Question

Question 1: Evaluating Investment projects You are planning to invest $50,000 in new equipment. This investment will generate net cash flows of $30,000 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, l.e., -100 not ($100) or (100). Should you invest? Why? ONO -- the NPV is negative, which indicates that the investment is unprofitable YES -- the NPV is negative, which indicates that the investment will reduce costs YES -- the NPV is positive, which indicates that the investment is profitable b) Compute the payback period. payback period = years c) Compute the accounting rate of return (ARR). To compute ARR, first compute: annual depreciation=$ 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? NPV only O payback method only ARR only always use all three methods to reach the best decision

Answer 1

@ NPV = NPV of cash inflows - Pr of cash outflows. - 30,000 prift (25% @yu) - 50,000 = 30,000 (bass tabss) - 50,000 = 30,000 x 1.44 - 50,000 = 43,200 - 50,000 = (6800) . NPV is Negative should not invest that the investment is unproptable Payback period - Initial investment Povestorent generating cashflowak Annual depleciation = $ 59,000 £25,000 Annual Income - 15000 $ (30,000) Average westment - 50,000 $25000 ARR - Average let propt . 15000 x0 Aug intet profet= 39000 & 50,000 30000 Inves © annual annual Ang er profet= 39000 = 15000 - 25000 4100 Arceage Investment à 60% (SOCO Average annualprofit & Total praht over invertance = 60 period @ No of year Always we all three methods to reach the best decision.