Question

# ben is considering the purchase of new piece of equipment. the cost savings from the equipment...

ben is considering the purchase of new piece of equipment. the cost savings from the equipment would result in an annual increase in net income of \$200000. the equipment will have an initial cost of \$1200000 and have an 8 year life. the salvage value of the equipment is estimated to be \$200000. the hurdle rate is 10%. what is accounting rate of return? b) what is the payback period? c) what is the net present value? d) what would the net pressent value be with the 15% hurdle rate? E) BASED ON THE NPV IN WHAT RANGE WOULD THE EQUIPMENT INTERNAL RATE OF RETURN FALL?

a) Accounting Rate of return = Average Net Income / Average Investment = 200,000 / 1,200,000/8 = 133.33%

b) Depreciation = Investment / Life = 1,200,000 / 8 = 150,000

Annual Cash Flow = Net Income + Depreciation = 200,000 + 150,000 = 350,000

Payback Period = Investment / Cash Flow = 1,200,000 / 350,000 = 3.43 years

c) NPV = - Investment + PV of annual cash flow + salvage

Present Value can be calculated using PV function

N = 8, PMT = 350,000, FV = 200,000, I/Y = 10% => Compute PV = \$1,960,525.65

NPV = 1,960,525.65 - 1,200,000 = \$760,525.65

d) If I/Y = 15% => PV = \$1,635,942.88

=> NPV = \$435,942.88

e) As NPV > 0 at 15%, it means IRR would be greater than 15%.

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