investment during retirement? How can these numbers be so different? P26-30A Usi
ID: 2534091 • Letter: I
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investment during retirement? How can these numbers be so different? P26-30A Using payback, ARR, NPV, IRR, and profitability index to make capital investment decisions Splash Nation is considering purchasing a water park in Atlanta, Georgia, for $1,910,000. The new facility will generate annual net cash inflows of $483,000 for eight years. Engineers estimate that the facility will remain useful for cight years and no residual value. The company uses straight-line depreciation, and its stockhold- ers demand an annual return of 10% on investments of this nature. Requirements 1. Compute the payback, the ARR, the NPV, the IRR, and the profitability index of this investment. 2. Recommend whether the company should invest in this project.Explanation / Answer
1. Payback Period = Initial Investment / Cash Inlfow Per period = 1910000/483000 = 3.95 Years.
2. ARR = Average Net Profit / Average Investment
Average Net Profit assumed to be Net Cash inflow = 483,000
Average Investment = (Initial investment + End Value of Investment)/2 = (1910000+0)/2 = 955,000
ARR = 483,000/955,000 = 50.58%
Average Net Profit assumed to be Net Cash inflow less Depreciation = 483,000-238,750 = 244,250
ARR = 244,250/955,000 = 25.58%
3. NPV or Net Present Value = Present Value of Inflow (PVIF) - Present Value of Outflow (PVOF)
PVOF = 1,910,000
PVIF = 483,000 * Present Value of Annuity for 1$ @ 10% for 8 Years
483,000*5.33 = 2,576,769
NPV = 2,576,769 - 1,910,000 = 666,769.
3. IRR or Internal Rate of Return is the interest rate at which NPV is Zero. It helps in evlauating the attractiveness of a project. If IRR is greaten than the required rate of return than the project is acceptable.
IRR can be calculated using trial and error or by using excel.
we have used excel to calculate IRR and it is 19%
4. The company should invest in this project because NPV is more than 0 as well as IRR is higher than expectation. Also the payback period of initial investment is also low as compared to total duration of the project.
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