Use the following information for the Quick Study below. [The following informat
ID: 2438271 • Letter: U
Question
Use the following information for the Quick Study below.
[The following information applies to the questions displayed below.]
Peng Company is considering an investment expected to generate an average net income after taxes of $2,700 for three years. The investment costs $51,000 and has an estimated $6,600 salvage value.
Compute the accounting rate of return for this investment; assume the company uses straight-line depreciation.
Assume Peng requires a 10% return on its investments. Compute the net present value of this investment. Assume the company uses straight-line depreciation. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided. Negative amounts should be indicated by a minus sign.)
Explanation / Answer
Average investment = [1/2x (Cost of the project - Scrap value)] + Scrap value
= [ 1/2 x (51,000 - 6,600) ] + 6,600
= 22,200 + 6,600
= $28,800
Average net income after tax = $2,700
Accounting rate of return = Average net income after tax/Average investment
= 2,700/28,800
= 9.37%
Calculation of Net present value
Annual depreciation = (Cost price - Scrap value)/Useful life
= (51,000 - 6,600)/3
= 44,400/3
= $14,800
Cash flows after tax = Profit after tax + Depreciation
= 2,700 + 14,800
= $17,500
Net present value = Present value of cash inflows - Investment in the project
= 48,479.1 - 51,000
= - $2,520.9
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Year Cash inflow (i) PVF (ii) Present value of cash inflows (i) x (ii) 1-3 17,500 2.487 43,522.5 3 6,600 0.751 4,956.6 Total 48,479.1