Question

Row Hamilton Inc. is considering investing in new boathouses working with solar energy for energy saving purposes. Assume that the expected annual cash inflows from new boathouses will be $10,000. A $35,000 net initial investment is required and they have five-year useful life and 12% required rate of return. Assume that the investment will occur immediately after management approves the project.

For making decision on whether to approve or reject the project, compute the Net Present Value (NPV) of this new investment and analyze whether it will be accepted or rejected and why. (10 marks)

To determine a rate at which NPV will be zero, compute Internal Rate of Return and analyze the result. (10 marks)

Compute paypack period and analyze the result. (5 marks)

Answer 1

Given Annual cash inflow for 5 years $10,000 cash outflow lie Snittal investment = $ 35,000 ① Compute the Net Present value of this new Investment and analyze whether it will be accepted or rejected. Present value of cash inflows. Years cost $ 0 Discount factor Product Ox© $10,000 3160478 $ 36,044:8 Present value of cash inflows 1$ 36,047.8 Cost & @124 Present value of cash outflows. Discount factor Productor@ Year $ 35.000 $ 35,000 Present value of cash outflow $ 35,000 o 1 Net Present Value CNPV) Present value of Present value of Cash outflows Cash inflows 36,047.8. - 35,000 1047.8$ .. NPV = 1047.8& NPV rule :- If NPV is Positive - Accept If NPV is Negative - Reject Since NPV is positive, Accept it.

a Computation of Internal rate of Return (IRR) one is 2 Now, select two discount factors, less than 12 and another one is greater than 12. In this case, lowest discount factor is 10 and thigher discount factor is la IRR = LDR + NPV at LDR CHOR-LOR) NPV at LDR - NPV at HDR where LDR = 107., HDR = 15% Calculation of Present value of cash inflows at LDR Year cost & Discount factor Product 0x 1-5 $ 10,000 3.79079 37,907.9 Present of cash inflow at LDR 37,907.9 calculation of Present value of cash intlows at HDR Discount factor Year Cost & @ 15 2 Product x② 1-5 $10,000 3.35215 33,521.5 Present value of cash inflow at HDR 33,521.5 NPV at LDR @ 10% 379079 – 35000 = 2,907,9 NPV at HDR @ 15% = 33521.5- 35000 = -1478.5 IRR = 10 + 2907.9 (15-10) 2907.9-(-1478.5) 10+ 29079 (5) 4386.4 10 + 3.3146 13.3146 , IRR = 13:3146% > 19/ The IRR is greater than minimum required rate of Hence, Investment should be accepted. retu

3 Computation of Payback period and analyze the result. . - Payback period Snitial Investment Annual Cash inflows 35000 10000 = 3.5 years . ². Payback period - 3.5 years It only takes 3.5 years yecoup for Row Hamilton Inc. It is good to invest in this to the investment Investment