1. A company is considering a proposal to invest $40,000 in a project that would
ID: 2474335 • Letter: 1
Question
1. A company is considering a proposal to invest $40,000 in a project that would provide the following net cash flows:
Year 1
$6,500
Year 2
12,700
Year 3
15,000
Year 4
12,800
Compute the project's payback period. Show your work
2. A company purchases a machine for $800,000. The machine has an expected life of 9 years and no salvage value. The company anticipates a yearly after-tax net income of $60,000 to be received uniformly throughout each year. What is the accounting rate of return?
3. A company is considering purchasing a machine for $85,000. The machine is expected to generate a net after-tax income of $11,250 per year. Depreciation expense would be $8,500. What is the payback period for this machine?
Year 1
$6,500
Year 2
12,700
Year 3
15,000
Year 4
12,800
Explanation / Answer
a) Year Net Cash Flows Cumulative Cash Flows
1 6500 6500
2 12700 19200
3 15000 34200
4 12800 47000
Pay back period=3 + 5800/47000=3.12 years
b) Accounting rate of return=60000/800000*100=7.5%
c) Pay back period
Cash Flow After Tax=Net profit after tax+Depreciation Expense
= 11250+8500=19750
=85000/19750=4.30 years
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