Don Adams Breweries is considering an expansion project with an investment of $1 .500000. The equipment will be depreciated to zero salvage value on a straight-line basis over 5 years. The expansion will produce incremental operating revenue of $400,000 annually for 5 years. The company's opportunity cost of capital is 12%. Ignore taxes.What is the NPV of the investment?
Answer(s): B
First, calculate the annual earnings and cash flows:
Don Adams Breweries is considering an expansion project with an investment of $1 .500000. The equipment will be depreciated to zero salvage value on a straight-line basis over 5 years. The expansion will produce incremental operating revenue of $400,000 annually for 5 years. The company's opportunity cost of capital is 12%. Ignore taxes. What is the SR of the investment?
Answer(s): A
First, calculate the annual earnings and cash flows:IRR is calculated by trial and error. Calculate the NPV at different discount rates. NPV at 10% = $400,000 (discount factor for 10%, 5years)--$1 500,000 = $400,000(3.791)--$1,500,000 = $16,400NPV at 11% = $400,000 (3.696)--$1,500,000 =-$21 600Thus, IRR lies between 10% and 11%. By interpolation, the actual IRR appears to be 10.43%{10 + [16,400 ÷ (16,400 + 21 ,600)}.
Don Adams Breweries is considering an expansion project with an investment of $1,500,000. The equipment will be depreciated to zero salvage value on a straight-line basis over 5 years. The expansion will produce incremental operating revenue of $400,000 annually for 5 years. The company's opportunity cost of capital is 12%. Ignore taxes. What is the book (accounting) rate of return of the investment using the average investment method?
First, calculate the annual earnings and cash flows:The average book income is $100,000. The average book value of investment is $750000 [($1,500,000 + 0) + 2]. Thus, the book rate of return is equal to 13.33% ($100,000 + $750,000).
Don Adams Breweries is considering an expansion project with an investment of $1,500,000. The equipment will be depreciated to zero salvage value on a straight-line basis over 5 years. The expansion will produce incremental operating revenue of $400,000 annually for 5 years. The company's opportunity cost of capital is 12%. Ignore taxes. What is the payback period of the project?
Answer(s): C
First, calculate the annual earnings and cash flows:The payback period in this case is equal to the investment divided by the annual operating cash flows that result from that investment. Thus, the payback period is 3.75 years ($1,500,000 ÷ $400,000).
Tonya, Inc. has a cost of capital of 15% and is considering the acquisition of a new machine that costs $800,000 and has a useful life of 5 years. Tonya projects that earnings and cash flow will increase as follows:What is the payback period of this investment?
The payback method is simply the time required to recover the investment. It does not consider the time value of money or returns after the payback period. When cash flows are not uniform, a cumulative calculation is necessary. Thus, 3.0 years is the payback period ($320,000 in the first year, $280,000 in the second year, and $200,000 in the third year).
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