Calculate net present value. 1. Calculate internal rate of return 2. 3. Calculate accrual accounting rate of return based on net initial investment. 4. Calculate accrual accounting rate of return based on average investment. 5. You have the authority to make the purchase decision. Why might you be reluctant to base your decision on the DCF methods?
Homework Answers
Initial Investment = $158000 + $12000 = $170000
Savings = $37500
Depreciation = ($158000 - $3000) / 9 = $17222
Net Income = $37500 - $17222 = $20278
1. PV annuity @12% for 9 years = 5.3282, PV factor for 9th year
@12% = 0.3606
NPV = $37500 x 5.3282 + $3000 x 0.3606 + $12000 x 0.3606 - $170000
= $35216.50
2. For IRR, NPV = 0,
PV annuity @17% for 9 years = 4.4506, PV factor for 9th year @12% =
0.2434
NPV = $37500 x 4.4506 + $3000 x 0.2434 + $12000 x 0.2434 - $170000
= $548.50
PV annuity @18% for 9 years = 4.3030, PV factor for 9th year
@12% = 0.2255
NPV = $37500 x 4.3030 + $3000 x 0.2255 + $12000 x 0.2255 - $170000
= ($5255)
RR = 17% + ($548.50) / ($548.50+$5255) = 17.09%
3. Accounting Rate of Return = $20278 / $170000 x 100 = 11.93%
4.
| Year | Book Value |
| 0 | 170000 |
| 1 | 152778 |
| 2 | 135556 |
| 3 | 118334 |
| 4 | 101112 |
| 5 | 83890 |
| 6 | 66668 |
| 7 | 49446 |
| 8 | 32224 |
| 9 | 2 |
| 910010 |
Accounting Return = $20278 / $91000 x 100 = 22.28%
Average Investment = $910010 / 10 = $91000
5. Since the project gives positive NPV and IRR higher than required rate of return, project is accepted.
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