Based on the information provided in the proforma statement attached below, comp

Question

Based on the information provided in the proforma statement attached below, compute the Net Present Value, the Internal Rate of Return, the Cash Payback and the Accounting Rate of Return. (Hint: Depreciation is not a cash flow) Assume a 10% interest rate.

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Sales revenue $ 580,000.00 $      609,000.00 $   639,400.00 $       671,000.00 $ 745,500.00 $ 782,000.00 Less: Operating expenses $ 320,000.00 $      336,000.00 $   352,800.00 $       370,400.00 $ 389,000.00 $ 408,500.00 Less: Depreciation expense $    60,000.00 $        60,000.00 $     60,000.00 $         60,000.00 $     60,000.00 $     60,000.00 Net income $ 200,000.00 $      213,000.00 $   226,600.00 $       240,600.00 $ 296,500.00 $ 313,500.00 Initial cost of the investment: $      600,000.00 Salvage value at the end of year 6: $        60,000.00

Explanation / Answer

Investment into the project TO calculate Net Present Value Initial Investment $      600,000.00 operating expenses $320,000.00 920,000 Year cash flows PV factor @10% Present value 1 200,000 0.909 181800 2 213,000 0.826 175938 3 226,600 0.751 170176.6 4 240,600 0.683 164329.8 5 296,500 0.621 184126.5 6 313,500 0.564 176814 1053184.9 NPV = cash outflows + cash inflows+PV of salvage value NPV = -920,000+ 1,053,184.9+ 33,840 = 167,024.90 To calculate Internal Rate of return Year cash flows PV factor @15% Present value 1 200,000 0.87 174000 2 213,000 0.756 161028 3 226,600 0.658 149102.8 4 240,600 0.572 137623.2 5 296500 0.497 147360.5 6 313,500 0.432 135432 1,490,200 904546.5 Annuity = 1,490,200 / 6 =248,366.67 payback period=920,000 / 248,366.67 = 3.70 Discount rate = 15% Year cash flows PV factor @14% Present value 1 200,000 0.877 175400 2 213,000 0.769 163797 3 226,600 0.675 152955 4 240,600 0.592 142435.2 5 296500 0.519 153883.5 6 313,500 0.456 142956 931426.7 IRR = 14% + 931426.7 - 920,000/ 931426.7 - 904546.5 IRR =14.425% To calculate Cash pay back Year cash flows Cumulative cash flow 1 200,000 200,000 2 213,000 413,000 3 226,600 639,600 4 240,600 880,200 5 296500 1,176,700 6 313,500 1,490,200 cash pay back = 4 + 920,000 - 880,200 / 1,176,700 cash pay back = 4.03 years Accounting rate of return = average income after taxes / average investment + salvage value ARR =248366.67/ 490,000 ARR = 50.68%

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