ACCT552 Week 7 Homework Assignment Please complete the below problems and submit

Question

ACCT552 Week 7 Homework Assignment Please complete the below problems and submit your answers in the Week 7 Dropbox. See "Syllabus/Due Dates for Assignments & Exams" for due date information. Three Rivers Company runs clothing stores in the Pittsburgh area. Three Rivers’ management estimates that if it invests $250,000 in a new computer system, it can save $75,000 in annual cash operating costs. The system has an expected useful life of 10 years and no terminal Disposal value. The required rate of return is 8%. Ignore income taxes and assume all cash flows occur at year-end except for initial investment amounts to calculate the following: 1. Net present value 2. Payback period 3. Discounted payback period 4. Internal rate of return (using the interpolation method) 5. Accrual accounting rate of return based on the net initial investment (assume straight-line depreciation) 6. What other factors should Three Rivers consider in deciding whether to purchase the new computer system? 7. Should they purchase the new system? Why or why not?

Explanation / Answer

1)Calculation of NPV:- Initial Investment in project/Computer System $      2,50,000.00 1)Calculation of NPV:- Year Cash /Inflow PVAF @8% Present value Remaining inv To be Recovered 1 $          75,000.00 0.926 $          69,450.00 $ 1,80,550.00 2 $          75,000.00 0.857 $          64,275.00 $ 1,16,275.00 3 $          75,000.00 0.794 $          59,550.00 $      56,725.00 4 $          75,000.00 0.735 $          55,125.00 $        1,600.00 5 $          75,000.00 0.681 $          51,075.00 $   (49,475.00) 6 $          75,000.00 0.63 $          47,250.00 7 $          75,000.00 0.583 $          43,725.00 8 $          75,000.00 0.54 $          40,500.00 9 $          75,000.00 0.5 $          37,500.00 10 $          75,000.00 0.463 $          34,725.00 PV of Cash Inflows $      5,03,175.00 Less:- Investment Amount $      2,50,000.00 Net Present Value $      2,53,175.00 ** Cash flows has to be discounted at Required rate of return 2.Payback Period 250000/75000 3.333 years .Payback Period = 3 years 4 months 3. Discounted payback period (From above table last column) 4 years+(1600/51075*12) 4.376 . Discounted payback period = years 5 month appx. 4 IRR At @30% rate of interest project Gives the Cash Flow 2,31,825 (Use the above table @ 30% rate) At @25% rate of interest project Gives the Cash Flow 2,67,825 i.e., For 5% rate of interest change Diff in Cash Flow(267825-231825) 36000 Therefore for 1% rate 7200 In order to know IRR, Cash Flow = Initial Investment = 250000 At 25% required decrease 17825 Rate of interest to increase 2.476 IRR (25+2.476) 27.476 5 Accrual Accounting rate of return NPV/Initial Investment 5,03,175/250000 2.0127 6 Other Factors to Consider:- * Demand of the business ** Operating Capacity of new system *** impact of organization process and employee morale 7 It is advisable to purchase the new system as NPV is positive.

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