cricket 12:19 AM east.cengagenow.com Roberts Company is considering an investmen

Question

cricket 12:19 AM east.cengagenow.com Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Year Cash Revenues $2,981,160 2,981,160 2,981,160 2,981,160 2,981,160 Cash Expenses $2,293,200 2,293,200 2,293,200 2,293,200 2,293,200 The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems. Required: 1. Compute the project's payback period. If required, round your answer to two decimal places. 3.33 years 2. Compute the project's accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box) 30 3. Compute the project's net present value, assuming a required rate of return of 10 percent. When required, round your answer to the nearest dollar $31471C 4. Compute the project's internal rate of return.

Explanation / Answer

A / 1 B C D E F 2 1. Calculation of payback period 3 Total initial investment/Cash outflow $2,293,200 4 Residual Value $0 5 Useful Life in Years                       5 6 Cash Revenues per annum $2,981,160 7 Cash Expenses per annum $2,293,200 8 Net Cashflow $687,960 9 10 Year Cashflows Cumulative Cashflows 11 0 ($2,293,200) ($2,293,200) 12 1 $687,960 ($1,605,240) 13 2 $687,960 ($917,280) 14 3 $687,960 ($229,320) 15 4 $687,960 $458,640 $229,320 =C15-D15 16 5 $687,960 $1,146,600 17 18 19 From the above table the cumulative cash flows are positive in 4th year, and 4th year investment to recover is $229,320 20 Therefore: 21 Yr1+Yr2+Yr3+(Yr4/$2000)                  0.33 =E15/C15 22 23 Hence payback period is 3.33 years 24 2) Calculation of Accounting Rate of Return 25 Year Income Expenses Net Income 26 1 $2,981,160 $2,293,200 $687,960 27 2 $2,981,160 $2,293,200 $687,960 28 3 $2,981,160 $2,293,200 $687,960 29 4 $2,981,160 $2,293,200 $687,960 30 5 $2,981,160 $2,293,200 $687,960 31 32 ARR= Average annual profit / Average Annual investment 33 Average annual profit = $687,960 =SUM(E26:E30)/5 34 Average investment = $2,293,200 =D3 35 Therefore ARR= 30.00% 36 3) Calculation of NPV 37 Year Cashflows PV@10% 38 0 ($2,293,200) ($2,293,200) 39 1 $687,960 $625,418 40 2 $687,960 $568,562 41 3 $687,960 $516,875 42 4 $687,960 $469,886 43 5 $687,960 $427,169 44 45 NPV $314,710 =SUM(D38:D43) 46 3) Calculation of IRR 47 Year Cashflows 48 0 ($2,293,200) 49 1 $687,960 50 2 $687,960 51 3 $687,960 52 4 $687,960 53 5 $687,960 54 55 IRR 15.24% =IRR(C48:C53)

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