Homework Answers
Section 1
Part A
NPV = present value of cash inflows – present value of cash outflow
= (17000*5.747 )-100000 = -$2301
Part B
Payback period = 100000/17000 = 5.88 years
Part C
Discounted payback period = 8 years
|
Cash flows |
PV factor |
Present value |
Cumulative discounted cash flows |
|
-100000 |
1 |
-100000 |
-100000 |
|
17000 |
0.926 |
15742 |
-84258 |
|
17000 |
0.857 |
14569 |
-69689 |
|
17000 |
0.794 |
13498 |
-56191 |
|
17000 |
0.735 |
12495 |
-43696 |
|
17000 |
0.681 |
11577 |
-32119 |
|
17000 |
0.630 |
10710 |
-21409 |
|
17000 |
0.583 |
9911 |
-11498 |
|
17000 |
0.540 |
9180 |
-2318 |
Part D
IRR = 6.46%
IRR factor = 100000/17000=5.882
Part E
Accrual account rate of return = net income / initial investment
Net income = increased contribution margin – depreciation = 17000-(100000/8) = 4500
ARR = 4500/100000 = 4.5%
Section 2
A. The upheaval of installing a new computer system. Its useful life is estimated to be 9 years. This means that Splendid could face this upheaval again in 9 years
B. The benefits of the new system for customers.
C. Issues related to the financing of the project, and the availability of capital to pay for the system.
D. The costs of training and other "hidden" start-up costs are included in the estimated $160,000 cost of the new machine.
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