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Diane Manufacturing Company is considering investing $500,000 in new equipment with an estimated useful life of 10 years and no salvage value. The equipment is expected to produce $320,000 in cash inflows and $200,000 in cash outflows annually. The company uses straight-line depreciation, and has a 30% tax rate. Diane Manufacturing desired rate of return on this project is 10%. Net cash flows for years 1 through 10 (99,000 X present value of $1 annuity factor) round to nearest dollar A. 120000 Recovery of investment in working capital (500,000 x (present value of $1 factor) B. Present Value of net cash flows C. Initial cash outlay500,000 Net Present Value

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Answer:

net income per year = $49,000

annual cash flows = $99,000

NPV = $108,315.40

payback period = 5.05 years

accounting rate of return = 19.6%

Explanation:

annual cash flow = [($320,000 - $200,000 - $50,000) x 0.7] + $50,000 = $99,000

NPV = -$500,000 + [$99,000 x 6.1446 (PV annuity, 10%, 10 periods)] = -$500,000 + $608,315.40 = $108,315.40

payback period = $500,000 / $99,000 = 5.05 years

accounting rate of return = net income per year / average investment = $49,000 / [($500,000 + $0)/2] = $49,000 / $250,000 = 19.6%

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