Question

Basic Concepts

Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,266,667. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows:

Year	Cash Revenues	Cash Expenses
1	$2,950,000	$2,270,000
2	2,950,000	2,270,000
3	2,950,000	2,270,000
4	2,950,000	2,270,000
5	2,950,000	2,270,000

The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems.

Required:

1. Compute the project’s payback period. If required, round your answer to two decimal places.
years

2. Compute the project’s accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box).
%

3. Compute the project’s net present value, assuming a required rate of return of 10 percent. When required, round your answer to the nearest dollar.
$

4. Compute the project’s internal rate of return. Enter your answers as whole percentage values.

Between  % and  %

Answer 1

Calculation of Annual net cash inflow = Cash revenues - Cash expenses

Cash Revenues Cash Expenses 2,270,000.00 $ 2,950,000.00 $ 2,270,000.00 $ 2,270,000.00 $ 2,950,000.00 $ 2,270,000.00 $ 2,270,000.00 $ Net Cash Inflow Year 2,950,000.00 $ 1 680,000.00 2 680,000.00 2,950,000.00 $ 3 680,000.00 $ 4 680,000.00 2,950,000.00 $ 5 680,000.00 et LC

1). Payback period = Initial Investment / Annual cash inflow
= $2,266,667 / $680,000
= 3.33 years

2). Accounting rate of return = Annual cash inflow / Initial Investment
= $680,000 / $2,266,667
= 0.30 or 30%

3). & 4). Calculation of NPV and IRR.

IRR is 15% rounded off to whole percent.

Cash Flows PVF @ 10% Present Value Year 1 $ (2,266,667.00) 0.9091 S 0.8264 $ (2,266,667.00) 0 680,000.00 1 618,188.00 680,000.00 2 561,952.00 0.7513 $ 0.683 $ 680,000.00 3 510,884.00 4 680,000.00 464,440.00 0.6209 $ 5 680,000.00 422,212.00 $ NPV 311,009.00 15.24% IRR