Question

What is the ARR, NPV, IRR, and profitability index?
Splash Planet is considering purchasing a water park in Atlanta, Georgia, for $1,820,000. The new facility will generate annual net cash inflows of $460,000 for eight years. Engineers estimate that the facility will remain useful for eight 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 (Click the icon to view the Present Value of $1 table.) (Click the icon to view Present Value of Ordinary Annuity of $1 table.) (Click the icon to view Future Value of Ordinary Annuity of $1 table.) (Click the icon to view Future Value of $1 table.) Read the requirements. 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 4.0 years 1,820,000 460,000 Next, determine the formula and calculate the accounting rate of return (ARR). (Round the percentage to the nearest tenth percent, XX%. ) Average annual operating income Average amount invested ARR %

Answer 1

payback period = amount invested/expected annual return
1820000/460000 = 4 years
ARR = Average annual operating income/average amount invested
460000/1820000 = 25%
net present value = present value of cash flow-investment
present value of cash inflow = 460000*PVIFA(12%, 8YEARS)
present value of cash inflow = 460000*4.968 = 2285280
Net present value = 2285280-1820000 = 465280
calculation of IRR
Years	cash flow
0	-1820000
1	460000
2	460000
3	460000
4	460000
5	460000
6	460000
7	460000
8	460000
IRR =	19%
Profitability index = present value of cash inflow/initial investment
Profitability index = 2285280/1820000 = 1.26