EVRON Corporation purchased an asset for $200,000. The following annual gross in
ID: 2720384 • Letter: E
Question
EVRON Corporation purchased an asset for $200,000. The following annual gross incomes and expenses were estimated. The minimum attractive rate of return (MARR) is 10% per year.
Year
1
2
3
4
Gross incomes ($)
80,000
150,000
120,000
100,000
Expenses ($)
-20,000
-40,000
-30,000
-50,000
a - Determine the Net Present Value (NPV) of the investment project.
b - How long (years) will it take to pay off the initial investment based on discounted payback method.
c - What rate of return (IRR) will this investment earn? Show your calculation.
Year
1
2
3
4
Gross incomes ($)
80,000
150,000
120,000
100,000
Expenses ($)
-20,000
-40,000
-30,000
-50,000
Explanation / Answer
Answer:
Information about Depreciation is missing in the question. So, i am calculating answer based on when depreciation is not considered
1) When Depreciation on Straight line method is NOT CONSIDERED
a. Net Present Value of Project = PV of Cash Flows - PV of Cash Outflow = $247,140 - $200,000 = $47,140
b. Discounted Payback Period = 2 Years + ($200,000 - $145,400) / $67,590 = 2 Years + 0.808 Years = 2.808 Years
c. Internal Rate of Return
IRR = Lower Rate + NPV at lower rate / (NPV at lower rate - NPV at higher rate) x Difference in rate
IRR = 20% + $2,440 / [($2,440 - ($4,740)] x 2%
IRR = 20% + $2,440 / $7,180 x 2% = 20% + 0.6796% = 20.6796% or 20.68%
Year A B C = A-B D E = C x D H Gross Income Expenses Net Income / Net Cash Flows Present Value Interest Factor (PVIF @ 10%) Present Value of Annual Cash Flows Accumulated PV of Cash Flows 1 $80,000 $20,000 $60,000 0.909 $54,540 $54,540 2 $150,000 $40,000 $110,000 0.826 $90,860 $145,400 3 $120,000 $30,000 $90,000 0.751 $67,590 $212,990 4 $100,000 $50,000 $50,000 0.683 $34,150 $247,140 Total Present Value of Cash Flows $247,140Related Questions
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