Yipann Corporation is reviewing an investment proposal. The initial cost, as well as other related data for each year. are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the Yipann uses a 24% after4axtargetrate of return for new investment proposals. The discount figures for a 24% rate of return are given.The net present value of the investment proposal is
Answer(s): B
The net present value is computed by deducting the initial cost of the investment from the present value of the future net cash flows. The present value of each of the future net cash flows is determined by multiplying it by the appropriate factor for the present value of an amount as shown below. The net present value is $10,450 ($115,450--$105,000).
Yipann Corporation is reviewing an investment proposal. The initial cost, as well as other related data for each year. are presented in the schedule below. All cash flows are assumed to take place at the end of the year. The salvage value of the investment at the Yipann uses a 24% after4axtargetrate of return for new investment proposals. The discount figures for a 24% rate of return are given.The traditional payback period for the investment proposal is
Answer(s): C
The payback period is the time required to recover the initial investment. The net cash inflows used to determine the payback period are not discounted. The initial cost was $105,000, and inflows during the first 2 years were $95,000 ($50,000 + $45,000). Thus, the first $10,000 ($105,000 -- $95,000) of the third year's net cash inflows will complete the recovery' of the initial investment. This amount is one1ourth of the third year's inflows. Hence, the payback period is 2.25 years.
Rex Company is considering an investment in a new plant which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before depreciation and taxes) is expected to be $800,000 per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that there are no taxes. What is the book (or accounting) rate of return for the investment using the average investment method?
Rex Company is considering an investment in a new plant which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before depreciation and taxes) is expected to be $800,000 per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that there are no taxes. What is the discounted payback period for the investment?
The discounted payback period is the number of years needed to get the PV of the cash flows to equal the initial investment. At a 14% discount rate, this occurs at 9.2 years. The discounted payback period was calculated by dividing the initial investment of $4.000000 by the annual cash flow of $800000 giving a 5.000 Present Value of Annuity Factor at 14%, which equals approximately 9.2 years.
Rex Company is considering an investment in a new plant which will entail an immediate capital expenditure of $4,000,000. The plant is to be depreciated on a straight-line basis over 10 years to zero salvage value. Operating income (before depreciation and taxes) is expected to be $800,000 per year over the 10-year life of the plant. The opportunity cost of capital is 14%. Assume that there are no taxes. What is the NPV for the investment?
Answer(s): A
The NPV is the difference between the present value of the estimated net cash inflows and the present value of the net cash outflows. The present value of the net cash inflows discounted at 14% is $4,172,800 [$800,000(5.216)]. Therefore, the NPV of the investment is $172,800 ($4,172,800 --$4,000,000).
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