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ch21 a - CH 21 21-17(2225 min Capital budget methods no...

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CH 21 21-17 (22–25 min.) Capital budget methods, no income taxes. 1a. The table for the present value of annuities (Appendix B, Table 4) shows: 5 periods at 12% = 3.605 Net present value = $60,000 (3.605) – $160,000 = $216,300 – $160,000 = $56,300 1b. Payback period = $160,000 ÷ $60,000 = 2.67 years 1c. Internal rate of return: $160,000 = Present value of annuity of $60,000 at R% for 5 years, or what factor (F) in the table of present values of an annuity (Appendix B, Table 4) will satisfy the following equation. $160,000 = $60,000F F = 000 , 60 $ 000 , 160 $ = 2.667 On the 5-year line in the table for the present value of annuities (Appendix B, Table 4), find the column closest to 2.667; it is between a rate of return of 24% and 26%. Interpolation is necessary: Present Value Factors 24% 2.745 2.745 IRR rate –– 2.667 26% 2.635 –– Difference 0.110 0.078 Internal rate of return = 24% + 110 . 0 078 . 0 (2%) = 24% + (0.7091) (2%) = 25.42% 1d. Accrual accounting rate of return based on net initial investment: Net initial investment = $160,000 Estimated useful life = 5 years Annual straight-line depreciation = $160,000 ÷ 5 = $32,000
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return of rate accounting Accrual = investment initial Net income operating annual
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