Water Planet is considering purchasing a water park in San Antonio, Texas, for $
ID: 2791829 • Letter: W
Question
Water Planet is considering purchasing a water park in San Antonio, Texas, for $1,950,000. The new facility will generate annual net cash inflows of $483,000 for eight years. Engineers estimate that the new facilities will remain useful for eighteight years and have no residual value. The company uses straight-line depreciation, and its stockholders demand an annual return of 12% on investments of this nature.
Present Value of Annuity of $1
Period
10%
12%
14%
16%
18%
20%
1
0.909
0.893
0.877
0.862
0.847
0.833
2
1.736
1.690
1.647
1.605
1.566
1.528
3
2.487
2.402
2.322
2.246
2.174
2.106
4
3.170
3.037
2.914
2.798
2.690
2.589
5
3.791
3.605
3.433
3.274
3.127
2.991
6
4.355
4.111
3.889
3.685
3.498
3.326
7
4.868
4.564
4.288
4.039
3.812
3.605
8
5.335
4.968
4.639
4.344
4.078
3.837
9
5.759
5.328
4.946
4.607
4.303
4.031
10
6.145
5.650
5.216
4.833
4.494
4.192
Requirements
1. Compute the payback period, the ARR, the NPV of this investment, and its IRR.
2. Recommend whether the company should invest in this project.
Present Value of Annuity of $1
Period
10%
12%
14%
16%
18%
20%
1
0.909
0.893
0.877
0.862
0.847
0.833
2
1.736
1.690
1.647
1.605
1.566
1.528
3
2.487
2.402
2.322
2.246
2.174
2.106
4
3.170
3.037
2.914
2.798
2.690
2.589
5
3.791
3.605
3.433
3.274
3.127
2.991
6
4.355
4.111
3.889
3.685
3.498
3.326
7
4.868
4.564
4.288
4.039
3.812
3.605
8
5.335
4.968
4.639
4.344
4.078
3.837
9
5.759
5.328
4.946
4.607
4.303
4.031
10
6.145
5.650
5.216
4.833
4.494
4.192
Explanation / Answer
cash outflow
-1950000
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 12%
0
-1950000
1
483000
431250
2
483000
385044.643
3
483000
343789.86
4
483000
306955.232
5
483000
274067.171
6
483000
244702.832
7
483000
218484.671
8
483000
195075.599
NPV
sum of present value of cash flow
449370.007
Payback period
initial investment/annual cash flow
1950000/483000
payback period in years
4.03726708
Accounting rate of return
(average return/average investment)*100
49.54%
average return
483000
average initial investment = initial investment/2
1950000/2
975000
Year
cash flow
0
-1950000
1
483000
2
483000
3
483000
4
483000
5
483000
6
483000
7
483000
8
483000
IRR = using irr function in MS excel spreadsheet =irr(-1950000,483000,483000,483000,483000,483000,483000,483000,483000)
18.32%
Yes company should investment in this project because NPV is positive and IRR is greater than 12% required rate of return
cash outflow
-1950000
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 12%
0
-1950000
1
483000
431250
2
483000
385044.643
3
483000
343789.86
4
483000
306955.232
5
483000
274067.171
6
483000
244702.832
7
483000
218484.671
8
483000
195075.599
NPV
sum of present value of cash flow
449370.007
Payback period
initial investment/annual cash flow
1950000/483000
payback period in years
4.03726708
Accounting rate of return
(average return/average investment)*100
49.54%
average return
483000
average initial investment = initial investment/2
1950000/2
975000
Year
cash flow
0
-1950000
1
483000
2
483000
3
483000
4
483000
5
483000
6
483000
7
483000
8
483000
IRR = using irr function in MS excel spreadsheet =irr(-1950000,483000,483000,483000,483000,483000,483000,483000,483000)
18.32%
Yes company should investment in this project because NPV is positive and IRR is greater than 12% required rate of return
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