(L. OBJ. 2, 4) Using the payback and accounting rate of return methods to make capital investment decisions, and using discounted cash flow models to make capital investment decisions [20—30 min]
Water World is considering purchasing a water park in San Antonio, Texas, for $1,910,000. The new facility will generate annual net cash inflows of $481,000 for eight years. Engineers estimate that the facility will remain useful for eight years and have no residual value. The company uses straight-line depreciation, and its stock- holders demand an annual return of 12% on investments of this nature.
Requirements
1. Compute the payback period, the ARR, the NPV of this investment, and its IRR.
2. Recommend whether the company should invest in this project.
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