Question

Water Nation is considering purchasing a waterpark in Saskatchewan for $1,950,000. The new facility wil generate annual net cash inflows of 5525,000 for 3 years. Engineers estimate that the facility will remain useful for years and have no residual value. The company uses straight-line depreciation. Ils owners want payback in less than 5 years and an ARR of 12% or more Management uses a 10% hurdle 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.) Requirements 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.) 2 Recommend whether the company should invest in this project 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 your answer to one decimal place.) The payback period is years The ARR (accounting rate of retum) %(Round your answer to one decimal place.) (Round your answer to the rest wiele dollar) Net present value The IRR (intemal rate of return) is between Requirement 2. Recommend whether the company should invest in this project Recommendation Enter any number in the edit fields and then continue to the next question Save for Later e A 400 ENG 5:47 PM 2020-09-23 o i Type here to search

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Answer 1

Req.1	The payback period is	3.7	Years	=1950000/525000
	( Initial investment / Annual net cash inflows )
	Accounting rate of return	28.8%	=281250/975000
	(Net Income / Average Investment )
	Working:
	Net Income	281,250	=525000-(1950000/8)
	Average Investment	975,000	=(1950000+0)/2
	Net Present Value	850,875	=(525000*5.335)-1950000
	( Present value of cash inflow - Initial investment )
	Internal rate of return is between	20% and 22%

	Working
	On dividing Initial investment by annual net cash inflow ,we get 3.714 ( 1,950,000 / 525,000 ) . On searching 3.714 in Present value of annuity of $1 table, we find that 3.714 lies between 20% & 22% in period 8.
Req.2	Recommendation: Invest in the new facility because Net Present value is positive, ARR is more than 12% & payback period is less than 5 years.