8 Drill 1. You’re trying to determine whether or not to expand your business by

Question

8 Drill

1.

You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $17.4 million, which will be depreciated straight-line to zero over its four-year life.

If the plant has projected net income of $1,755,000, $2,115,000, $1,974,000, and $1,296,000 over these four years, what is the project’s average accounting return (AAR)? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Accounting return ________%

2.

What is the IRR of the above set of cash flows? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

If the plant has projected net income of $1,755,000, $2,115,000, $1,974,000, and $1,296,000 over these four years, what is the project’s average accounting return (AAR)? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places (e.g., 32.16).)

Explanation / Answer

Average Accounting Return = Average Profit/ Average Investment Average Profit 1755000 2115000 1974000 1296000 7140000 Average Income = 7140000/4 1785000 Average Accounting Return = 1785000/17400000 0.102586207 Average Accounting Return is 10.25% 2 NPV at 10% Discount Net Flow 0 -32000 1 -32000 1 14200 0.909091 12909.09 2 17500 0.826446 14462.81 3 11600 0.751315 8715.252 NPV 4087.153 NPV at 20% Discount Net Flow 0 -32000 1 -32000 1 14200 0.833333 11833.33 2 17500 0.694444 12152.78 3 11600 0.578704 6712.963 NPV -1300.93 IRR = Lower Rate+ NPV at lower rate/ npvat lower rate+npv at higher rate ( HR-LR) 10+4087.15/4087.15+1300.93 ( 20-10) 10+7.5 17.50% IRR is 17.5%

Related Questions

Navigate

• Browse (All)
• Browse 8
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.