Question

Sierra Mustard Company estimates the following cash flows and depreciation on a project that will cost...

Sierra Mustard Company estimates the following cash flows and depreciation on a project that will cost $200,000 and will last 10 years with no salvage value:

  Revenues

               Sales revenue                                                                            $80,000

      Operating expenses

               Salary expense                                            $32,000

               Depreciation expense                                   20,000

               Miscellaneous expenses                                 8,000                   60,000

      Net Income                                                                                        $20,000

Instructions

(a)   Calculate the expected annual rate of return on this project showing calculations to support your answer.

(b)   Calculate the cash payback on this project showing calculations to support your answer.

Business   Accounting   
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Homework Answers

Answer #1

Initial Investment = $200,000

Annual Net Cash flows = Annual Net Income + Annual Depreciation
Annual Net Cash flows = $20,000 + $20,000
Annual Net Cash flows = $40,000

Answer a.

Average Investment = Initial Investment / 2
Average Investment = $200,000 / 2
Average Investment = $100,000

Annual Rate of Return = Annual Net Income / Average Investment
Annual Rate of Return = $20,000 / $100,000
Annual Rate of Return = 20.00%

Answer b.

Payback Period = Initial Investment / Annual Net Cash flows
Payback Period = $200,000 / $40,000
Payback Period = 5.00 years

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