Question

Answer a through e for the following

Answer each independent question, (a) through (e), below. a. Project A costs $5,500 and will generate annual after-tax net cash inflows of $2,600 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 $5,500 and will generate after-tax cash inflows of $660 in year 1, $1,400 in year 2, $2,400 in year 3, $2,700 in year 4, and $2,400 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 $5,500 and will generate net cash inflows of $3,000 before taxes for 5 years. The firm uses straight-line depreciation with no salvage value and is subject to a 30% 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 $5,500 and will generate sales of $4,400 each year for 5 years. The cash expenditures will be $1,700 per year. The firm uses straight-line depreciation with an estimated salvage value of $700 and has a tax rate of 30%. (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.) 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 7% on investment. e2. What is the NPV of project B? Assume that the firm requires a minimum after-tax return of 7% on investment. e3. What is the NPV of project C? Assume that the firm requires a minimum after-tax return of 7% on investment. e4. What is the NPV of project D? Assume that the firm requires a minimum after-tax return of 7% on investment. Payback period Payback period Payback period years a. years b. years C. d1 Book rate of return Book rate of return % d2. NPV of Project A NPV of Project B e1 e2. NPV of Project C e3. NPV of Project D e4.

Answer 1

Only first four questions are solved.

Requirement (a) Project A (a) Annual after tax cash flows $ 2,600 (b) Initial costs 5,500 (c) Payback period (b/a) (5500/2600) 2.12 Requirement (b) Project B Net Cash Cumulative Cash Year outflow Flows $ -5,500 $ 660 $ 1,400 $ 2,400 $ 2,700 $ $ 2,400 $ 0 -5,500 $ -4,840 $ 2 -3,440 $ 3 -1,040 $ 1,660 5 4,060 The cash flow became positive in between year 3 and year 4 Hence payback period is Year 3 (1040/2700) 3.39 years

Requirement (c) Project C Annual before tax cash flows 2,600 () Depreciation p.a (5500/5) $ 1,100 $ Income before tax 1,500 )Tax at 30% -450 Income after tax 1,050 $ (+) Depreciation 1,100 $ (a) Annual cash flow after tax 2,150 $ (b) Initial costs 5,500 (c) Payback period (b/a) (5500/2150) 2.56 Requirement (d) Project D $ Sales 4,400 () Cash expenditure $ -1,700 () Depreciation (5500-700)/5 $ 960 Net Accounting return 1,740 (-) Tax at 30% -522 $ Net accounting return after tax 1,218 $ Original Investment 5,500 Accounting return based on Original inv. (1218/5500) 22.15% $ Average return (5500+700)/2 3,100 Accounting return based on Average inv. 39.29% (1218/3100)

Conclusion 2.12 years a. Payback period b. Payback period 3.39 years 2.56 years c. Payback period d1. Book rate of return 22.15% d2. Book rate of return 39.29%