Question

Pearl insulating Company is considering purchasing a new equipment. It will require an initial investment of 7,000,000. The new project will provide 200.000 income each year, over the next four years. The scrap value for hew equipment will be $120,000 The expected cash flow for the next 4 years are as follows: Year 1 2 Cash flow (5) 2,800,000 2,450,000 10% decrease from year2 1,300,000 3 4 Required: 1. Calculate ARR 2. Decide whether company will purchase new equipment or not if the expected rate of return is 12%. 3. What is the disadvantage to company if they are using ARR method? 4. Calculate the payback period 5. Decide whether company will accept or reject the proposal if the targeted payback period is 2 years. 6. What is the advantage to company if they are using pay back method? 7. Calculate NPV, if required rate of return is 12%. 8. Should company accept or reject project as per NPV and why? 9. Why company has finally decided to use NPV method for capital budgeting? maries (2 marks (1 marki 16 marts marks) (2marks) (10 marks) 2 marks) (2 marks)

i only want the answers with out explian

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Answer 1

1) The average rate of return or ARR = total profits (after depreciation and tax) /net investment * no. of years of profit *100

= 17.14%

2) the npv is negative the company will not purchase new equipment

3) The main disadvantage of ARR is that it ignores the time value of money.

4)Payback period of the project will be 2 years and 2 months = 2.2

5) The company will definitely accept the project because it is capable of returning the initial investment in a couple of years. The rest of the life the project will produce profit for the company.

6) The payback period is very much easy in calculation. The company will exactly know within how much time it can earn profit.

7) at 12% rate of return NPV is negative 151071 (-151071)

8) According to the result obtained from NPV analysis, the company should reject the project as it does not provide positive NPV. ( -151071)

9) NPV is most widely used tool for making capital budgeting decisions. This because that the company can analysis thoroughly how much cash flow can be generated from the investment made. Also, NPV calculates the present value of future cash flows. That means this method consider time value of money.