Revenues $300,000 Less operating expenses: Rent $169,000 Insurance 15,000 Depreciation 46,000 Maintenance 20,000 250,000 Net operating income $ 50,00...
|
Revenues |
$300,000 |
|
|
Less operating expenses: |
||
|
Rent |
$169,000 |
|
|
Insurance |
15,000 |
|
|
Depreciation |
46,000 |
|
|
Maintenance |
20,000 |
250,000 |
|
Net operating income |
$ 50,000 |
1. A company has estimated the annual revenues and expenses for a project it is considering (listed above) that will cost a total of $500,000, have a ten-year useful life, and has a salvage value of $40,000. The company requires a payback period of 5 years or less.
- Using the information above, what is the expected annual cash flow for this company? ______________
- What is the payback period?
__________________________
Would the company consider this project? _____________ - What is the internal rate of return to the nearest percent? _______________
d. What is the simple rate of return promised by the project?
_____________________________
If the company requires a simple rate of return of at least 10%,
will the games be purchased? __________
Please show work
Homework Answers
| Annual Cashflows: | |||||
| Net Income | 50000 | ||||
| Add: Depreciation | 46000 | ||||
| Annual Cashflows: | 96000 | ||||
| Payback period = Initial investment / Annual cashflow | |||||
| 500000/96000= 5.21 yrs | |||||
| NO, the project shall not be taken up. | |||||
| Initial investment | 500000 | ||||
| Divide: Annual cashflows | 96000 | ||||
| Annuity PVF for 10 yrs required | 5.208333 | ||||
| Rate at which this factr arises | 14.04% | ||||
| Thus, | |||||
| IRR = 14.04% | |||||
| Net Income | 50000 | ||||
| Divide: Average investment | 250000 | ||||
| (500000+0)/2 | |||||
| Simple rate of return | 20% | ||||
| Yes, the Games must be purchased | |||||
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Revenues $300,000 Less operating expenses: Rent $169,000 Insurance 15,000 Depreciation 46,000 Maintenance 20,000 250,000 Net operating income $ 50,00...
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