Internal rate of return
A project is estimated to cost $104,328 and provide annual net cash flows of $21,000 for eight years. Determine the internal rate of return for this project.
Cash payback period for a service company
Fidelity Bancorp Inc. is evaluating two capital investment proposals for a drive-up ATM kiosk, each requiring an investment of $280,000 and each with an eight-year life and expected total net cash flows of $448,000. Location 1 is expected to provide equal annual net cash flows of $56,000, and Location 2 is expected to have the following unequal annual net cash flows:
Year 1 $90,000 Year 5 $42,000
Year 2 70,000 Year 6 42,000
Year 3 60,000 Year 7 42,000
Year 4 60,000 Year 8 42,000
Determine the cash payback period for both location proposals.
Net present value method
The following data are accumulated by Dillion Company in evaluating the purchase of $39,000 of equipment, having a four-year useful life.
Net Income Net cash Flow
Year 1 mce_markernbsp; 4,100 $14,000
Year 2 8,100 18,000
Year 3 7,100 17,000
Year 4 2,100 12,000
a. Assuming that the desired rate of return is 15%, determine the net present value for the proposal. Use the table of the present value of $1 appearing in Exhibit 2 of this chapter.
b. Would management be likely to look with favor on the proposal? Explain.
Average rate of return method, net present value method, and analysis for a service company
The capital investment committee of Touch of Eden Landscaping Company is considering two capital investments. The estimated income from operations and net cash flows from each investment are as follows:
Front-End Loader Greenhouse Fixtures
Income from Net Cash Income from Net Cash
Year Operations Flow Operations Flow
1 $23,000 $ 35,000 $10,200 $ 22,200
2 20,000 32,000 10,200 22,200
3 12,000 24,000 10,200 22,200
4 (2,000) 10,000 10,200 22,200
5 (2,000) 10,000 10,200 22,200
$51,000 $111,000 $51,000 $111,000
Each project requires an investment of $60,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis.
Instructions:
1. Compare the following:
a. The average rate of return for each investment. Round to one decimal place.
b. The net present value for each investment. Use the present value of $1 table appearing in this chapter (Exhibit 2). Round present values to the nearest dollar.
2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments.