Answer each independent question, (a) through (e), below.
a. Project A costs $7,000 and will generate annual after-tax net cash inflows of $2,850 for 5 years. What is the payback period for this investment under the assumption that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.)
b. Project B costs $7,000 and will generate after-tax cash inflows of $950 in year 1, $1,850 in year 2, $2,900 in year 3, $2,850 in year 4, and $2,900 in year 5. What is the payback period (in years) for this investment assuming that the cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.)
c. Project C costs $7,000 and will generate net cash inflows of $3,250 before taxes for 5 years. The firm uses straight-line depreciation with no salvage value and is subject to a 30% tax rate. What is the payback period under the assumption that all cash inflows occur evenly throughout the year? (Round your answer to 2 decimal places.)
d. Project D costs $7,000 and will generate sales of $4,700 each year for 5 years. The cash expenditures will be $1,850 per year. The firm uses straight-line depreciation with an estimated salvage value of $400 and has a tax rate of 30%.
(1) What is the accounting (book) rate of return based on the original investment? (Round your answer to 2 decimal places.)
(2) What is the book rate of return based on the average book value? (Round your answer to 2 decimal places.)
Use the built-in NPV function in Excel to calculate the amounts for projects a through d. (Round your answers to the nearest whole dollar amount.)
e1. What is the NPV of project A? Assume that the firm requires a minimum after-tax return of 6% on investment.
e2. What is the NPV of project B? Assume that the firm requires a minimum after-tax return of 6% on investment.
e3. What is the NPV of project C? Assume that the firm requires a minimum after-tax return of 6% on investment.
e4. What is the NPV of project D? Assume that the firm requires a minimum after-tax return of 6% on investment.
Answer of Part a:
Payback Period = Initial Investment / Annual Cash Flow
Payback Period = $7,000 / $2,850
Payback Period = 2.46 days
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