Answer:
a. 3.8 years
b. 12.63%
c. -$9,761.19
Explanation:
a. Cash Payback period.
The amount of time it would take for cash inflows to offset the initial outflow (investment).
= Investment/ Annual inflow
= 190,000 / 50,000
= 3.8 years
b. Annual income / Average Assets
= 12,000 / ( (190,000 + 0) / 2)
= 12.63%
c. Annual inflow is $50,000 for 5 years. Net present value is the present value of inflows less investment
Present value of inflows = 50,000 * (1 - ( 1 + 12%)⁻⁵ / 12%)
= $180,238.81
Net Present Value = 180,238.81 - 190,000
= -$9,761.19
a. Calculating the Cash Payback period:
Cash Payback period refers to the amount of time it would take for cash inflows to offset the initial outflow
Cash Payback period = Investment/ Annual inflow
Cash Payback period = 190,000 / 50,000
Cash Payback period = 3.8 years
b. Calculating the annual rate of return on the proposed capital expenditure:
Annual rate of return = Annual income / Average Assets
Annual rate of return = $12,000 / (($190,000 + 0) / 2)
Annual rate of return = $12,000 / $95,000
Annual rate of return = 0.126315789
Annual rate of return = 12.63%
c. Annual inflow is $50,000 for 5 years.
Net present value is the present value of inflows less investment
Present value of inflows = Annual inflow * (1 - (1 + i)^-n / i)
Present value of inflows = $50,000 * (1 - (1 + 12%)^-5 / 12%)
Present value of inflows = $180,238.81
Net Present Value = Present value of inflows - initial outflow
Net Present Value = 180,238.81 - 190,000
Net Present Value = -$9,761.19
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