Based on the information provided in the proforma statement attached below, comp
ID: 2650987 • Letter: B
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
Acme International
Proforma Income Statements
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
Discount rate: 10%
Explanation / Answer
Answer:
Calculation of Net Present value
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Initital Cost
$ (600,000.00)
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)
Net cash flows (A)
$ (600,000.00)
$ 260,000.00
$ 273,000.00
$ 286,600.00
$ 300,600.00
$ 356,500.00
$ 373,500.00
PVF (At 10% Discount rate ) (B)
1.00000
0.90909
0.82645
0.75131
0.68301
0.62092
0.56447
1/(1+0.10)^0
1/(1+0.10)^1
1/(1+0.10)^2
1/(1+0.10)^3
1/(1+0.10)^4
1/(1+0.10)^5
1/(1+0.10)^6
Present Value (PV) =A*B
$ (600,000.00)
$ 236,363.64
$ 225,619.83
$ 215,326.82
$ 205,313.84
$ 221,358.45
$ 210,831.01
Ner Present value (Sum of PVs)
$ 714,813.60
Calculation of Internal Rate of Return (IRR)
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Initital Cost
$ (600,000.00)
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)
Net cash flows (A)
$ (600,000.00)
$ 260,000.00
$ 273,000.00
$ 286,600.00
$ 300,600.00
$ 356,500.00
$ 373,500.00
IRR =
41.98%
Calculation of Cash Payback Period:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Initital Cost
$ (600,000.00)
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)
Net cash flows (A)
$ (600,000.00)
$ 260,000.00
$ 273,000.00
$ 286,600.00
$ 300,600.00
$ 356,500.00
$ 373,500.00
Cummulative Net cash flows
$ (600,000.00)
$ (340,000.00)
$ (67,000.00)
$ 219,600.00
$ 520,200.00
$ 876,700.00
$ 1,250,200.00
we can see that Cummulative cash flows become positive in year 3 Hence Payback period in between 2 to 3 year
now we shall calculate accurate Payback period using interpolation technique
Cash Payback Period = 2 Years + (67000/286600)
2.23
Years
Calculation of Accounting Rate of Return :
Year 0
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)
Net Income
$ -
$ 260,000.00
$ 273,000.00
$ 286,600.00
$ 300,600.00
$ 356,500.00
$ 373,500.00
Total income
$ 1,850,200.00
Average income (1850200 /6)
$ 308,366.67
Initital Cost
$ 600,000.00
ARR = Avg. income/ Initial cost
51.39%
Calculation of Net Present value
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Initital Cost
$ (600,000.00)
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)
Net cash flows (A)
$ (600,000.00)
$ 260,000.00
$ 273,000.00
$ 286,600.00
$ 300,600.00
$ 356,500.00
$ 373,500.00
PVF (At 10% Discount rate ) (B)
1.00000
0.90909
0.82645
0.75131
0.68301
0.62092
0.56447
1/(1+0.10)^0
1/(1+0.10)^1
1/(1+0.10)^2
1/(1+0.10)^3
1/(1+0.10)^4
1/(1+0.10)^5
1/(1+0.10)^6
Present Value (PV) =A*B
$ (600,000.00)
$ 236,363.64
$ 225,619.83
$ 215,326.82
$ 205,313.84
$ 221,358.45
$ 210,831.01
Ner Present value (Sum of PVs)
$ 714,813.60
Calculation of Internal Rate of Return (IRR)
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Initital Cost
$ (600,000.00)
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)
Net cash flows (A)
$ (600,000.00)
$ 260,000.00
$ 273,000.00
$ 286,600.00
$ 300,600.00
$ 356,500.00
$ 373,500.00
IRR =
41.98%
Calculation of Cash Payback Period:
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Initital Cost
$ (600,000.00)
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)
Net cash flows (A)
$ (600,000.00)
$ 260,000.00
$ 273,000.00
$ 286,600.00
$ 300,600.00
$ 356,500.00
$ 373,500.00
Cummulative Net cash flows
$ (600,000.00)
$ (340,000.00)
$ (67,000.00)
$ 219,600.00
$ 520,200.00
$ 876,700.00
$ 1,250,200.00
we can see that Cummulative cash flows become positive in year 3 Hence Payback period in between 2 to 3 year
now we shall calculate accurate Payback period using interpolation technique
Cash Payback Period = 2 Years + (67000/286600)
2.23
Years
Calculation of Accounting Rate of Return :
Year 0
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)
Net Income
$ -
$ 260,000.00
$ 273,000.00
$ 286,600.00
$ 300,600.00
$ 356,500.00
$ 373,500.00
Total income
$ 1,850,200.00
Average income (1850200 /6)
$ 308,366.67
Initital Cost
$ 600,000.00
ARR = Avg. income/ Initial cost
51.39%
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