Question

12-9. Answer each independent question, (a) through (e), below.

a. Project A costs $7,500 and will generate annual after-tax net cash inflows of $3,100 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 $7,500 and will generate after-tax cash inflows of $1,000 in year 1, $1,900 in year 2, $3,300 in year 3, $2,900 in year 4, and $3,300 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 $7,500 and will generate net cash inflows of $3,500 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 $7,500 and will generate sales of $4,800 each year for 5 years. The cash expenditures will be $1,900 per year. The firm uses straight-line depreciation with an estimated salvage value of $450 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 7% on investment.

e2. What is the NPV of project B? Assume that the firm requires a minimum after-tax return of 7% on investment.

e3. What is the NPV of project C? Assume that the firm requires a minimum after-tax return of 7% on investment.

e4. What is the NPV of project D? Assume that the firm requires a minimum after-tax return of 7% on investment.

years a. b. years years d1. d2. Payback period Payback period Payback period Book rate of return Book rate of return NPV of Project A NPV of Project B NPV of Project C NPV of Project D e1. e2. e3. e4.

Answer 1

Answer of Part a:

Payback Period = Initial Investment / Annual Cash Flow
Payback Period = $7,500 / $3,100
Payback Period = 2.42 year

Answer of Part b: Year Cash Flow Cumulative Cash Flow 11 1000 1000 1900 2900 3 3300 6200 2900 9100 3300 12400 Payback Period = 3year + ($7,500 - $6,200) / $2,900 Payback Period = 3.45 year