Question

Yappy Company is considering a capital investment of $320,000 in additional equipment. The new equipment is expected to have a useful life of 8 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income is expected to be 25,000 and cash inflows are expected to be $65,000. Yappy requires a 10% return on all new investments.

Instructions: Using each of the methods below, show ALL your work for calculating the answer. Round to 2 decimal points when necessary. Number your responses below to correspond with the order in the question.

1. Cash payback period

2. Net present value

3. Profitability index

4. Internal rate of return

5. Annual rate of return

6. Based on the information computed above, should the investment be accepted? Why or why not?

Answer 1