Question

Problem 3. A proposed investment is not expected to have any salvage value at the end of its 5- year life. For present value purposes, cash flows are assumed to occur at the end of each year. The Company uses a 12% after-tax target rate of return. Purchase Cost and Annual Net After- Annual Net Year Book Value Tax Cash Flows Income 0 500,000 - - 1 336,000 240,000 70,000 2 200,000 216,000 78,000 3 100,000 192,000 86,000 4 36,000 168,000 94,000 5 - 144,000 102,000 Discount Factors for a 12% Rate of Return Present Value of an Present Value of P1 at Year the End of Each Period Annuity of P1 at the End of Each Period 1 0.89 0.89 2 0.80 1.69 3 0.71 2.40 4 0.64 3.04 5 0.57 3.61 6 0.51 4.12 Required: (10 points each) Compute for the following: 1. Accounting rate of return based on the average investment 2. Net Present Value 3. Traditional Payback Period

          Problem 3.
A proposed investment is not expected to have any salvage value at the end of its 5-
year life. For present value purposes, cash flows are assumed to occur at the end of
each year. The Company uses a 12% after-tax target rate of return.
Purchase Cost and
Annual Net After-
Annual Net
Year
Book Value
Tax Cash Flows
Income
0
500,000
-
-
1
336,000
240,000
70,000
2
200,000
216,000
78,000
3
100,000
192,000
86,000
4
36,000
168,000
94,000
5
-
144,000
102,000
Discount Factors for a 12% Rate of Return
Present Value of an
Present Value of P1 at
Year
the End of Each Period
Annuity of P1 at the
End of Each Period
1
0.89
0.89
2
0.80
1.69
3
0.71
2.40
4
0.64
3.04
5
0.57
3.61
6
0.51
4.12
Required: (10 points each)
Compute for the following:
1. Accounting rate of return based on the average investment
2. Net Present Value
3. Traditional Payback Period

Problem 3.
A proposed investment is not expected to have any salvage value at the end of its 5-
year life. For present value purposes, cash flows are assumed to occur at the end of
each year. The Company uses a 12% after-tax target rate of return.
Purchase Cost and
Annual Net After-
Annual Net
Year
Book Value
Tax Cash Flows
Income
0
500,000
-
-
1
336,000
240,000
70,000
2
200,000
216,000
78,000
3
100,000
192,000
86,000
4
36,000
168,000
94,000
5
-
144,000
102,000
Discount Factors for a 12% Rate of Return
Present Value of an
Present Value of P1 at
Year
the End of Each Period
Annuity of P1 at the
End of Each Period
1
0.89
0.89
2
0.80
1.69
3
0.71
2.40
4
0.64
3.04
5
0.57
3.61
6
0.51
4.12
Required: (10 points each)
Compute for the following:
1. Accounting rate of return based on the average investment
2. Net Present Value
3. Traditional Payback Period

Added by John N.

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