Question

Water Nation is considering purchasing a waterpark in San Antonio, Texas, for $2.200,000. The new facility will generale annual net cash inflows of $505.000 for ten years Engineers estimate that the facility will remain useful for ten years and have no residual value. The company uses straight-line depreciation its owners want payback in less than five years and an ARR of 12 or more Management uses a 10% hurde rate on investments of this nature Click the icon to view the present value annuity table) Click the icon to view the present value table Click the icon to view the future value annuity table.) Click the icon to view the future value table.) Read the rements Requirement 1. Compute the payback period, the ARR, the NPV and the approximate IRR of this investment (if you use the tables to compute the IRR answer with the closest interest rate shown in the tables.) (Round the payback period to one decimal place) The payback period is years. A Reference Reference 門前心能說 如是說一下, 一 三司, 心形五 以上 的門 当劳送器甚差,誤差与要是苯写 從總體關應將機體 四則 附盟盟搭船山北路 等 ; oooooooooooooo ---- 三要是 所配院加盟欧凯 20 切開內部 是看雪学 uuuuuuuce口口口。 此出出出出出 為活动。 . . 自定表 17 21 13: HS) 产品容器 00」的 0 174 | 0 |105 Tool || 000 | ||| | | _| 情 Print Done Print Done Enter any number in the ed elds and then dick Check Answer 4 Mines - Clear All Check ASES

Answer 1

Part a – Payback Period	4.36 years
Payback Period is the length of time within which initial investment or cost is returned back to the company.
Payback Period
Initial Investment or Cost of Water Park Cash Flow	$2,200,000
(Initial Cash Outflow) (A)
Annual Net Cash Inflows (B)	$505,000
Payback Period (A / B)	4.36
(2200000/505000)	Years
Part b – Accounting Rate of Return (ARR)
Accounting rate of return is the percentage of annual return on initial investment.
This method uses Net Income after depreciation and tax in calculation.
Accounting Rate of Return (ARR) = Net Income after depreciation and taxes / Initial Investment x 100
Accounting Rate of Return (ARR)	12.95%
Annual Cash Inflow	$505,000
Less: Annual Straight line Depreciation (Refer Note 1)	($220,000)
Net Income after Depreciation (A)	$285,000
Initial Investment (B)	$2,200,000
Accounting Rate of Return (A / B x 100)	12.95%
Note 1 - Annual Depreciation
Cost of Asset	$2,200,000
Less: Salvage Value	$0
Net Depreciable Value of Asset	$2,200,000
Divide by Estimated Useful Life	10 Years
Annual Depreciation ($2,200,000 / 10)	$220,000

Part c – Net present value

Step 2 -	Calculation of Net Present Value
Year		Cash Flow	PV factor @ 10%	Present Value
0	Initial Cash Outflow	($2,200,000)	1	($2,200,000)
1	Annual Cash Inflow	$505,000	0.909	$459,045
2	Annual Cash Inflow	$505,000	0.826	$417,130
3	Annual Cash Inflow	$505,000	0.751	$379,255
4	Annual Cash Inflow	$505,000	0.683	$344,915
5	Annual Cash Inflow	$505,000	0.621	$313,605
6	Annual Cash Inflow	$505,000	0.564	$284,820
7	Annual Cash Inflow	$505,000	0.513	$259,065
8	Annual Cash Inflow	$505,000	0.467	$235,835
9	Annual Cash Inflow	$505,000	0.424	$214,120
10	Annual Cash Inflow	$505,000	0.386	$194,930
	Net Present Value			$902,720

Net Present Value of Investment = $902,720

Part d – Internal Rate of Return

IRR is the rate at which all the expected future cash inflows equals to the initial investment.

IRR is the rate at which Present Value of Cash Inflows = Present Value of Cash Outflow

Looking to the Present Value Ordinary Annuity factor table we can get the value for 1 period.

At 18%, the value of future cash inflows

$505,000 x PVIFA (18%, 10) i.e. 4.494 = $2269,470

At 20%, the present value of future cash inflows

$505,000 x PVIFA (20%, 10) i.e. 4.192 = $$2,116,960

At IRR the present value of future cash flows should be equal or close to initial investment.

Hence, the IRR is between 18% and 20%

The correct option is 18% and 20%

Using Excel

18.88426%