Initial Investment = $800,000
Salvage Value = $100,000
Useful Life = 7 years
Annual Depreciation = (Initial Investment - Salvage Value) /
Useful Life
Annual Depreciation = ($800,000 - $100,000) / 7
Annual Depreciation = $100,000
Annual Net Income = (Revenue - Expenses - Depreciation) * (1 -
tax)
Annual Net Income = ($345,000 - $162,000 - $100,000) * (1 -
0.21)
Annual Net Income = $65,570
Annual Net Cash Flow = Annual Net Income + Annual
Depreciation
Annual Net Cash Flow = $65,570 + $100,000
Annual Net Cash Flow = $165,570
Answer 1.
Average Investment = (Initial Investment + Salvage Value) /
2
Average Investment = ($800,000 + $100,000) / 2
Average Investment = $450,000
Accounting Rate of Return = Annual Net Income / Average
Investment
Accounting Rate of Return = $65,570 / $450,000
Accounting Rate of Return = 0.15 or 15%
Answer 2.
Payback Period = Initial Investment / Annual Net Cash Flow
Payback Period = $800,000 / $165,570
Payback Period = 4.83 years
Answer 3.
Required Return = 8%
NPV = -$800,000 + $165,570 * PVA of $1 (8%, 7) + $100,000 * PV
of $1 (8%, 7)
NPV = -$800,000 + $165,570 * 5.20637 + $100,000 * 0.58349
NPV = $120,367.68
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