Featured Exercise Willet Company provides the following information on a capital

ID: 2420566 • Letter: F

Question

Featured Exercise

Willet Company provides the following information on a capital-budgeting project:

Net initial investment

$100,000

Estimated useful life

4 years

Estimated before-tax annual cash flow from operations

$33,000

Estimated terminal disposal value

$7,000

Required rate of return

12%

Income tax rate

30%

Willet uses straight-line depreciation and ignores the terminal disposal value in computing depreciation for tax purposes.

Compute present values in this exercise by using either the tables in Appendix A at the back of the textbook or a calculator.

For this project:

a. Compute NPV.

b. Compute IRR (to the nearest tenth of a percent).

c. Compute payback.

d. Compute AARR on net initial investment (to the nearest tenth of a percent). (Horngren 208-209)

Horngren, Charles T., Srikant Datar, Madhav Rajan. Student Study Guide for Cost Accounting. Pearson Learning Solutions, 2015-06-01. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.

1. NPV=-$100,000+$33,000*0.7*PVAF for 4 years @12%+$7,000*.7*Pv 4th year @12%+$25,000*0.3*PVAF for 4 years @12%

=-$100,000+$23,100*3.037+$4,900*0.64+$7500*3.37=-$3,931.8

2.NPV @10%=-$100,000+$23,100*3.17+$4,900*0.68+$7500*3.17=$100,334

IRR=10%-$334(8%-10%)/4,265.8=10.16%

C Pay Back period=$100,000/$23,100=4.329

D.AARR=$23,100*100/$100,000=23.10%

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.