P26-29A (similar to) Question Help Water Nation Water Nation is considering purc

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P26-29A (similar to) Question Help Water Nation Water Nation is considering purchasing a water park in Atlanta, Georgia, for $ 1 comma 870 comma 000 $1,870,000. The new facility will generate annual net cash inflows of $ 487 comma 000 $487,000 for eight eight years. Engineers estimate that the new facilities will remain useful for eight eight years and have no residual value. The company uses straight-line depreciation, and its stockholders demand an annual return of 10 10% on investments of this nature. LOADING... (Click the icon to view the Present Value of $1 table.)      LOADING... (Click the icon to view the Present Value of Annuity of $1 table.) Requirements 1. Compute the payback, the ARR, the NPV, the IRR, and the profitability index of this investment. 2. Recommend whether the company should invest in this project. Requirement 1. Compute the payback, the ARR, the NPV, the IRR, and the profitability index of this investment. First, determine the formula and calculate payback. (Round your answer to one decimal place, X.X.) Amount invested / Expected annual net cash inflow = Payback $ 1,870,000 / $ 487,000 = 3.8 years Next, determine the formula and calculate the accounting rate of return (ARR). (Round the percentage to the nearest tenth percent, X.X%.) Average annual operating income / Average amount invested = ARR / $ 935,000 = %

Explanation / Answer

NPV= Cash Inflows- Cash Outflows

Cash Inflows= PVAF(10%, 8Years)

= 460000*5.33 = 2454060

NPV= 2454060-1870000 = $ 587060

Profitability Index= Cash Inflows/ Cash Outflows = 2454060/1870000= 1.31

Payback Period

.564

Payback period = 5+126600/259440

=5.5 Years

As the project is having positive Net Present Value and Profitability Index is more than 1 , the project should be accepted

0 (1870000) 1 4600000 .909 418140 -1451860 2 460000 .826 379960 -1071900 3 460000 .751 345460 -726440 4 460000 .683 314180 -412260 5 460000 .621 285660 -126600 6 460000

.564

259440 132840

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