Question

PLEASE ANSWER THE QUESTION IN PLAIN EXCEL FORMAT IN A WAY THAT IS EASILY UNDERSTOOD. THANK YOU.

10 [EXCEL] Average accounting rate of return (ARR): Capitol Corp. management is expecting a project to generate after-tax income of $63,435 in each of the next three years. The average book value of the project's equipment over that period will be $212,500. If the firm's investment decision on any project is based on an ARR of 37.5 percent, should this project be accepted?

11 [EXCEL] Internal rate of return: Refer to Problem 4. What is the IRR that Franklin Mints management can expect on this project? (PROBLEM 4 AND ANSWER BELOW)

Problem 4: Net present value: Management of Franklin Mints, a confectioner, is considering purchasing a new jelly bean-making machine at a cost of $312,500. They project that the cash flows from this investment will be $121,450 for the next seven years. If the appropriate discount rate is 14 percent, what is the NPV for the project?

(PROBLEM 4 SOLVED)

#4
Year	Cash flow	PVF@14%	Present value
0	$-3,12,500	1	$(3,12,500)
1	$1,24,000	0.877	$1,08,772
2	$1,24,000	0.769	$95,414
3	$1,24,000	0.675	$83,696
4	$1,24,000	0.592	$73,418
5	$1,24,000	0.519	$64,402
6	$1,24,000	0.456	$56,493
7	$1,24,000	0.4	$49,555
		Net Present Value	$2,19,250

Answer 1

Question 10:

Average Accounting Rate of Return (ARR)= (Average profit/Average investment)

Given, Average after tax income= $63,435 and average book value of equipment= $212,500

Therefore, Expected ARR= ($63,435/$212,500)*100 = 29.8518%

Also given, minimum acceptable ARR= 37.5%

Since the expected ARR is less than the minimum required , this project shall not be accepted.

Question 11:

Given, cost of machine= $312,500

Yearly cash flows= $121,450 for seven years. Discount rate=14%

NPV= PV of cash flows – Cost = $121,450*PVA (14%,7) - $312,500

=$312,500 - $121,450*4.288305 = $520,814.62 -$312,500 = $208,314.62

(Note: the numbers reported in the solved question #4 given as part of question #11 are different from the narration of that problem. Hence this question #11 is solved using the numbers in the narration of question #4)