Question

Che Answer each independent question, (a) through (e), below. a. Project A costs $5,000 and will generate annual after-tax net cash inflows of $1,800 for 5 years. What is the payback period for this investment under the assumption that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.) b. Project B costs $5,000 and will generate after-tax cash inflows of $500 in year 1: $1,200 in year 2, $2,000 in year 3; $2,500 in year 4; and $2,000 in year 5. What is the payback period (in years) for this investment assuming that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.) c. Project C costs $5,000 and will generate net cash inflows of $2,500 before taxes each year for 5 years. The firm uses straight-line depreciation with no salvage value and is subject to a 25% tax rate. What is the payback period under the assumption that all cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.) d. Project D costs $5,000 and will generate sales of $4,000 each year for 5 years. The cash expenditures will be $1,500 per year. The firm uses straight-line depreciation with an estimated salvage value of $500 and has a tax rate of 25%. (1) What is the accounting (book) rate of return based on the original investment? (Round your answer to 2 decimal places.) (2) What is the book rate of return based on the average book value? (Round your answer to 2 decimal places.) ces Use the built-in NPV function in Excel to calculate the amounts for projects A through D. (Round your answers to the nearest whole dollar amount.) e1. What is the NPV of project A? Assume that the firm requires a minimum after-tax return of 8% on investment. e2. What is the NPV of project B? Assume that the firm requires a minimum after-tax return of 8% on investment e3. What is the NPV of project C? Assume that the firm requires a minimum after-tax return of 8% on investment e4. What is the NPV of project D? Assume that the firm requires a minimum after-tax return of 8% on investment. a Payback period Payback period 2.78 years 3.52 years Prey 1 of 2 !! Next > here to search

Answer 1

Following is the cash flow calculation for project C and Project D:

Particulars	Project C	Project D
Sales	NA	4,000
Cash Expenditure	NA	1,500
Cash Flow Before Tax and Depreciation	2,500	2,500
Depreciation	1,000	900
Cash Flow Before Tax	1,500	1,600
Less: Tax	375	400
After tax	1,125	1,200
Add: Depreciation	1,000	900
Net Cash Flow	2,125	2,100

Depreciation for calculated using formula (Cost-Salvage Value) / Life.

The following is the NPV calculation:

Particulars	Project A	Project B	Project C	Project D
Net Cash Flow Year 1	1,800	500	2,125	2,100
Net Cash Flow Year 2	1,800	1,200	2,125	2,100
Net Cash Flow Year 3	1,800	2,000	2,125	2,100
Net Cash Flow Year 4	1,800	2,500	2,125	2,100
Net Cash Flow Year 5	1,800	2,000	2,125	2,100
Disc Factor	8%	8%	8%	8%
PV	7,187	6,278	8,485	8,385
Initial Investment	5,000	5,000	5,000	5,000
NPV	2,187	1,278	3,485	3,385

NPV is the Net Present Value = Present Value of future cash flows - Initial Cost.

If NPV is positive, a project is favorable to be started or invested in.