11.41 Payback and ARR Gleason and Company is planning to invest $5 million in a
ID: 2581563 • Letter: 1
Question
11.41 Payback and ARR Gleason and Company is planning to invest $5 million in a new, stand-alone project. Before depreciation and taxes, it expects this project to yield a positive cash flow of $14 million each year for five years. The firm expects to depreciate the investment on a straight-ine basis over five years and with zero salvage value. The applicable discount rate is 12% and the tax rate is 30%. Required: a. What is the payback period on this project? (Round answer to zero decimal places.) b. what is the project's accounting rate of return? (Round answer to two decimal places, eg 10.87%.) years Question Attempts: Unlimited SAVE FOR LATER SURMET ANSWERExplanation / Answer
Answer a Calculation of payback period on this project Payback period = Initial Investment / Operating cash flow per year Payback period = $50,00,000 / $12,80,000 = 3.91 i.e.4 years Working Depreciation per year using straight line method = (Cost - salvage value)/useful life = ($50,00,000 - 0)/5 = $10,00,000 Operating cash flow per year Cash flow before depreciation and taxes $1,400,000 Less : Depreciation $1,000,000 Profit before taxes $400,000 Less : Taxes @ 30% $120,000 Net Income $280,000 Add : Depreciation $1,000,000 Operating Cash flow per year $1,280,000 Answer b Project's Accounting rate of return = Accounting profit (i.e.Net Income) / Initial Investment Project's Accounting rate of return = $2,80,000 / $50,00,000 = 5.60%
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