Question

Question 1: Evaluating investment projects You are planning to invest $25,000 in new equipment. This investment will generate net cash flows of $15,000 a year for the next 2 years. The salvage value after 2 years is zero. The cost of capital is 25% a year. a) Compute the net present value NPV = $ Enter negative numbers with a minus sign, i.e., -100 not ($100) or (100). Should you invest? Why? YES -- the NPV is positive, which indicates that the investment is profitable NO -- the NPV is negative, which indicates that the investment is unprofitable YES -- the NPV is negative, which indicates that the investment will reduce costs b) Compute the payback period. payback period = years c) Compute the accounting rate of return (ARR). To compute ARR, first compute: annual depreciation=$ annual income=$ average investment=$ ARR = If your answer is 10%, enter 10 without the percent sign. % d) Which of the three methods in (a)-(c) should you use in real life? CNPV only C payback method only CARR only always use all three methods to reach the best decision

Answer 1

Trfal our Slow : 495000 Cash nflow er annum 4 1S000 dox 2 dears AnnuRy tactoY Sof years 5 net Psesent value of flod .uuioo 421600 a)Net Present value 1 425000 -4 21600 4 3406 ND-The Npv s negatue which ndcates 4hat he unprofptable Gnvest ment s Pay back PeRod -nnalnuest ment Pay back Peod Net cash elow Per annum 25000 1 62 Jecs 1S000 20 months Annual depreciation 4 25000 12 SO0 2 Defaecaton Annual fncome net cash flow- So00-12 S00 $2500

Average ovest meut ఇ5pం 2 :12 S00 ARR $ 2 S00 3 12500 Ava nvest mewt :20%. 20 (or) o.2 Th Feal fe as tconsioers the we use me value and es money com monly used by olul the useks

All the required calculations are shown clearly