Question

Emphasis AaBbcc Heading 1 1 Normal Paragraph Strong Styles Annual Rate of Return ABC is considering the purchase of equipment for $900,000. Useful life estimated at 6 years (no salvage value). Annual revenues are expected to increase by $400,000 with estimated expenses increasing by $190,000. (excludes Depreciation (S-L)). ABC requires a rate of return of 9%. (cost of capital = 9%) Compute ARR? NPV? Profitability Index (similar projects in the company portfolio have an index of .75)? Payback (3 years)? Would you accept this project?

Answer 1

Solution Project Year Nettesh inflow 1 Calculation of Niv of the Praf@9% Presentalne $ 210,000 .9174 $192654 2 $210,000 .8417 $176757 3 $210,000 .7722 $162,162 $210,000 7084 $148764 5 $ 210,000 6500 $136,500 6. $ 210.000 .5963 $ 125,223 Total 1 260,000 4.486 4 $942,060 Initial Invest ment NPV = Present value of future Cesh flowes =) $942,060 $9,00,00 000 => $42,060 * Net Cash flow = Annual revenue estimated increases expenses increasing $1 -> $400,000 190,000 -) $ 210,000 Same for all 6 years. CS Scanned with CamScanner

of น Calculation ARR ARR = Anesage Antent profit Annual Anésage Irinestment => ㅋ $140,000 > 46,67 % $45oooo Amt (54,00,000 X6 ) $ 1140,000 Calculation of Anesage Annual Annual Profit Inflows years 1-6 $240000 hess: Annual Expenses ($190,000 X6) $1260,000 Average Annceal profit $210,000 °C $1260,000; 6) Calculation of Anesage Investment Average Investment -(Book nalus at Var I + Book nalue at End of useful Total profit 2 life's & -) $ 900,000 40 2 -> $450,00 CS Scanned with CamScanner

Calculation of Profitability Index Profitability – besent malus of futuro Cosh flows Initial Investment in Roject - $942060 Index 900,000 1.0467. → Calculation of Payback period Paybook period = Annael expected cast inflow initial in fayback period a litil investment Annual expected Cash Inflow $900,000 $210,000 -> 4.985 years, We will accept the soject as NPV is positive & profitability index is more than Industry but pay back period is less than Industry if the company have no att other alter alternative to innestments, it is preferble to invest in the above project CS Scanned with CamScanner