2. The partnership of Michele and Mark is considering the following long-term ca
ID: 2590115 • Letter: 2
Question
2. The partnership of Michele and Mark is considering the following long-term capital investment proposal. Relevant data on the project is listed below. Salvage value is expected to be zero for the project. Depreciation is computed by the straight-line method. The company's rate of return is the company's cost of capital which 12%. Brown Capital Investment $200,000.00 Annual Net Income Year 1 Year 2 Year 3 Year 4 Year 5 Total $25,000.00 $16,000.00 $13,000,00 $10,000.00 $8,000.00 000.00 Required a. Compute the cash payback period for the project. (round to two decimal places) b. Compute the net present value for the project (round to the nearest dollar) c. Compute the annual rate of return for the project. d. Compute the profitability index for the project.Explanation / Answer
Answer
Cost of capital = 12%
Initial Investment = 200,000
Useful life = 5 Years
Depreciation per year = 200,000 / 5 Years = 40,000 per year
Year
Net Income
Depreciation
Net cash flow
(Income + Dep.)
PVF @12%
PV of Cash Inflow
(Net cash * PVF)
1
25,000
40,000
65,000
0.892
57,980
2
16,000
40,000
56,000
0.797
44,632
3
13,000
40,000
53,000
0.711
37,683
4
10,000
40,000
50,000
0.635
31,750
5
8,000
40,000
48,000
0.567
27,216
Total
199,261
A.
Payback period = 3 Years + (200,000 – 174,000) / 50,000
= 3 years + 0.52
Payback period = 3.2 Years
B.
NPV = PV of cash Inflows – Initial Cash outflow
= 199,261 – 200,000
NPV = (739)
C.
Year
Net cash flow
PVF @10%
PV of Cash Inflow
(Net cash * PVF)
1
65,000
0.909
59,085
2
56,000
0.826
46,256
3
53,000
0.751
39,803
4
50,000
0.683
34,150
5
48,000
0.62
29,760
Total
209,054
NPV = 209054 – 200000 = 9054
ARR= 10% + 9054/(9054+739) * 2%
= 46%
4.
PI = PV of cash Inflows / Initial cash outflow
= 199,261 / 200,000
PI = 0.996
Year
Net Income
Depreciation
Net cash flow
(Income + Dep.)
PVF @12%
PV of Cash Inflow
(Net cash * PVF)
1
25,000
40,000
65,000
0.892
57,980
2
16,000
40,000
56,000
0.797
44,632
3
13,000
40,000
53,000
0.711
37,683
4
10,000
40,000
50,000
0.635
31,750
5
8,000
40,000
48,000
0.567
27,216
Total
199,261
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