I need help with requirement #1. Attached are the screenshots for the problem, r
ID: 2535437 • Letter: I
Question
I need help with requirement #1. Attached are the screenshots for the problem, requirement, and the related tables.
P12-618 (book/static) Question Help * Lazy River World is considering purchasing a water park in Chattanooga, Tennessee, for $1,950,000. The new facility will generate annual net cash inflows of $505,000 for eight years. Engineers estimate that the facility will remain useful for eight years and have no residual value. The company uses straght-line depreciation its owners want payback in less than five years and an ARR of 10% or more. Management uses a 14% hurdle rate on investments of this nature. (Click the icon to view the present value annuity table) (Clc the icon to view the present value table) (Click the icon to view the future value annuity table.) (Click the icon to view the future value table.) kl:requirements Requirement 1. Compute the payback period, the ARR, the NPV and the approximate IRR of this investment (Round the payback period to one decimal place.) The payback period is years Enter any number in the edit fields and then click Check Answer. parts remaining Clear All Check AnswerExplanation / Answer
1. Payback period = 3.9 Years
= Initial Investment / cash flow
= $1950000 / 505000 = 3.9 Years
2. Accounting rate of return (ARR) = 13.40%
Depreciation = $1950000 / 8 = $2,43,750
Net Income = Cash Flow - Depreciation
= $5,05,000 - $2,43,750 = $2,61,250
Accounting Rate of return = (Net Income / Initial Investments) * 100
= ($261250 / 1950000) x 100 = 13.40%
3. Net present value (NPV) at 9% = $3,92,695
= [ $5,05,000 x (PVAF 14%,8 Years) ] - $19,50,000
= [ $5,05,000 x 4.639 ] - $19,50,000
= $23,42,695 - $1950000
= $3,92,695
Dicision
YES. The Company should accept the project since the Payback period is less than the company’s requirement and also the Net Present Value is Positive $3,92,695