Bryant Company has obtained the following data about a possible planned investme

Question

Bryant Company has obtained the following data about a possible planned investment:

Cost $270,000
Terminal salvage value in 8 years $10,000
Annual cash oprtating savings for 8 years: $50,000
Estimated useful life in years: 8
Minimum desired rate of return: 10%
Present value of ordinary annuity, 10%, 8 periods: 5.3349
Present value of one, 10%, 8 periods: 0.4665

The company uses straight-line depreciation method. Ignore income taxes.

The cash operating savings of $50,000 do not include depreciation expense.

Required:
A) Compute the net present value of the investment.
B) Compute the payback period.
C) Compute the accounting rate of return using the initial required investment.

Explanation / Answer

Since there is no income tax, the depreciation expense shall be irrelevant for calculation of net present value.

A)

Present value of annual cash savings = $50,000*5.3349 = $266,745

Present value of salvage value = $10,000 * 0.4665 = $4,665

Net present value = - Initial investment + present value of annual cash inflows + present value of salvage value = -$270,000 + $266,745 + $4,665 = $1,410

B)

Payback period = Initial investment / Annual cash inflows = $270,000/$50,000 = 5.40 years

C)

Annual savings = $50,000

Annual Depreciation expense = Initial investment/Useful life = $270,000/8 years = $33,750

Net annual incremental accounting income = $50,000 - $33,750 = $16,250

Accounting rate of return = $16,250/$270,000 = 0.0602 = 6.02%

Related Questions

Navigate

• Browse (All)
• Browse B
• Subjects

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