Question

Problem 2 (Ignore taxes for this problem)

Bullock Prosthetics is planning to buy 3-D printing machinery costing $380,000. This machinery’s expected useful life is 5 years. They require a minimum rate of return of 8%, and have calculated the following data pertaining to the purchase and operation of this machinery:

Year	Estimated Annual Cash Inflows	Estimated Annual Cash Outflows	Depreciation
1	$ 90,000	$15,000	$60,000
2	$150,000	$45,000	$60,000
3	$230,000	$95,000	$60,000
4	$270,000	$110,000	$60,000
5	$300,000	$125,000	$60,000

1. Determine Terra's payback period, accounting rate of return, and NPV for this investment?

Answer 1

Working Note:-

Year	Estimated Annual	Estimated Annual	Depreciation (c )	Net Income (a-b-c)	Cummulative Cash Inflow
	Cash Inflows (a)	Cash Outflows (b)
1	$90,000	$15,000	$60,000	$15,000	$90,000
2	$150,000	$45,000	$60,000	$45,000	$240,000
3	$230,000	$95,000	$60,000	$75,000	$470,000
4	$270,000	$110,000	$60,000	$100,000	$740,000
5	$300,000	$125,000	$60,000	$115,000	$1,040,000
Total	$1,040,000	$390,000	$300,000	$350,000

ARR= Average Income / Average Investment

=$70000/$190000= 46.67%

=Average Income= 350000/5= $70000

Average Investment =(Investment- Residual Value)/2

(380000-80000)/2=150000

Payback period = 2+ (380000-240000)/230000

=2.61 Year

Computation of NPV
Year	Estimated Annual	Estimated Annual	PVAF @8%	NPV
	Cash Inflows (a)	Cash Outflows (b)	( C)	(a-b)Xc
Initial Investment	$0.00	$380,000.00	1.0000	-$380,000.00
1	$90,000.00	$15,000.00	0.9259	$69,444.44
2	$150,000.00	$45,000.00	0.8573	$90,020.58
3	$230,000.00	$95,000.00	0.7938	$107,167.35
4	$270,000.00	$110,000.00	0.7350	$117,604.78
5	$300,000.00	$125,000.00	0.6806	$119,102.06
5	$80,000.00		0.6806	$54,446.66
Net Presetn Value				$177,785.86