Hi please answer all requirements. Thank you :) Splash World is considering purc

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Hi please answer all requirements. Thank you :)

Splash World is considering purchasing a water park in Miami, Florida, for S2,050,000. The new facility will generate annual net cash inflows of $515,000 for eight years. Engineers estimate that the facility will remain useful for eight years and have no res dual value he com any uses straight-line depreciation s owners want payback n less than five years and an RR o 0% or more N anagement uses a 12 hurdle ate investments of his nat (Click the icon to view the present value annuity table) (Cick the icon to view the present value table) (Click the icon to view the future value annuity table) (Click the icon to view the future value table ) Read the requirements Requirement 1. Compute the payback period, the ARR, the NPV, and the approximate IRR of this investment. (If you use the tables to compute the IRR, answer with the closest interest rate shown in the tables.) (Round the back period to one decimal place.) pay The payback period is yeans (Round the percentage to the nearest tenth percent.) The ARR (accounting rate of return) is (Round your answer to the nearest whole dollar.) Net present value S The IRR (internal rate of return) is between Enter any number in the edit fields and then continue to the next question

Explanation / Answer

Payback Period:-

Initial Investment / Net annual cash Inflow

2050000/515000 = 3.98 or 4 years

Accounting Rate of Return :-

Avg accounting profit / Initial Investment

Avg accounting profit = Annual cash Inflow – Depreciation

Depreciation = 2050000 / 8 years = $256250

Avg accounting profit = 515000 – 256250 = 258750

ARR = 258750/2050000 = 12.62 or 12.60%

Net Present Value :-

PV of Cash Inflow – Initial Investment

PVAF for 8 years @ 12% = 4.968

PV of cash Inflow = PVAF * annual cash inflow

      = 4.968 * 515000 = 2558520

Initial Investment = 2050000

NPV = 2558520 – 2050000 = $508520

(2) Yes the company should invest in this project

    Because:-

In Payback Period, the company wants payback less than 5

& actual Payback is 4 years

In ARR, Company wants return 10% or more

& actual ARR = 12.60%

In NPV, Company wants hurdle rate 12%

At 12% hurdle rate, the NPV is positive

Hence in all above cases the company is in favourable side Hence project accepted

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