Question

Rolling Wave is considering purchasing a water park in Newark, New Jersey​, for $2,050,000. The new facility will generate annual net cash inflows of $515,000 for eight years. Engineers estimate that the facility will remain useful for eight years and have no residual value. The company use straight-line depreciation. Its owners want payback in less than five years and an ARR of 10​% or more. Management uses a 14​% hurdle rate on investments of this nature.

The present value annuity​ table:

iReference park i mpany annuit Periods 1% 2% 8 % 3% 4% 5% 6% 10% 12% 14% 16% 18% 20% nnuity 0.990 0.980 0.971 0.962 0.952 0943 0.926 0.909 0.893 0877 0.862 0.847 0.833 1.970 1.942 1.913 1886 1859 1833 1783 1.736 1690 1.647 1.605 1.566 1,528 3 2.941 2884 2.829 2775 2.723 3546 2.673 2.577 2.487 2402 2.322 2246 2.174 2.106 4 3.902 3.808 3.717 3630 3.465 3.312 3.170 3.037 2914 2.798 2690 2589 5 4853 4713 4.580 4.452 4,329 4212 3993 3.791 3605 3.433 3.274 3.127 2991 the AR 6 5.795 5.601 5.417 5242 5.076 5.786 4,917 4.623 4.355 4.111 3.889 3685 3.498 3.326 3.605 7 6728 7,652 6.472 6230 6.002 6.733 5.582 5206 4.868 4.564 4.288 4.039 3.812 7.325 7.020 6463 6.210 5747 5.335 4.968 4.639 4.344 4.607 4.078 3.837 9 8.566 8.162 7.786 7.435 7.108 6.802 6.247 5.759 5.328 4.946 4,303 4.031 10 9471 8.983 8.530 8.111 7.722 7.360 6.145 6.710 5.650 5.216 4.833 4.494 4.192 11 10.368 9.787 9.253 8.760 8.306 7.887 7.139 6495 6.814 5.938 5453 5.029 4.656 11.255 10.575 4.327 12 9.954 9.385 9 986 8.863 9.394 8 384 8.853 9 295 7.536 7.904 6.194 6424 6628 6.811 5.660 6 842 6.002 6.142 5,197 5.342 4.793 4.439 4.533 13 12.134 11.348 10.635 13.004 12.106 11.296 10 563 13 865 12 849 11.938 11,118 10 380 7.103 7.367 7606 4910 14 9.899 8244 5.468 5.575 5.008 5.092 15 4.611 9.712 8.559 4.675 18.046 16 351 14.877 13.590 12462 11.470 9.818 22 023 19 523 20 8.514 7.469 6 623 25 5.929 17413 15.622 14 094 19 600 17 292 15 372 5.353 4870 12.783 10.675 9077 13 765 11 258 9427 15.046 11.925 7843 6.873 25 808 6097 6467 30 22 396 4.948 8.066 8.244 32 835 27 355 23.115 19.793 17.159 7.003 40 6.177 6.233 5517 4979 4.997 9.779 7.105 5.548 n click d Print Done

The future value annuity​ table:

The present value​ table:

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 the payback period to one decimal​ place.)

The payback period is

years.

(Round the percentage to the nearest tenth percent)

The ARR (accounting rate of return) is:

(Round your answer to the nearest whole dollar)

Net Present Value $:

Requirement 2: Recommend whether the company should invest in this project.

Answer 1

Solution 1:

Payback period = Initial investment / Annual cash inflows = $2,050,000 / $515,000 = 3.98 years

Average investment = $2,050,000 / 2 = $1,025,000

Annual net income = Cash inflows - Depreciation = $515,000 - ($2,050,000/8) = $258,750

ARR = $258,750 / $1,025,000 = 25.24%

Computation of NPV
Particulars	Period	Amount	PV Factor	Present Value
Cash Outflows:
Initial investment	0	$2,050,000	1	$2,050,000
Present value of cash outflows (A)				$2,050,000
Cash Inflows:
Annual net cash inflows	1-8	$515,000	4.639	$2,389,085
Present value of cash Inflows (B)				$2,389,085
NPV (B-A)				$339,085

Present value factor at IRR = Initial investment / Annual cash inflows = $2,050,000 / $515,000 = 3.981

Refer factor table, this PV factor falls nearest to discount rate = 18%

Therefore IRR = 18%

Solution 2:

As all the conditions have been satisfied, therefore company should invest in the project.