P97
Net Present Value, Internal Rate of Return, Payback, Accounting Rate of Return, and
Taxes [LO 2, 3, 4, 6]
Adrian Sonnetson, the owner of Adrian Motors, is considering the addition of a paint and body
shop to his automobile dealership. Construction of a building and the purchase of necessary
equipment is estimated to cost $800,000 and both the building and equipment will be depreciated
over 10 years using the straightline method. The building and equipment have zero estimated
residual value at the end of 10 years. Sonnetson’s required rate of return for this project is 12
percent. Net income related to each year of the investment is as follows:
Revenue
$500,00
0
Less:
Material cost
70,000
Labor
150,000
Depreciation
80,000
Other
10,000
Income before taxes
190,000
Taxes at 40%
76,000
Net income
$114,00
0
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Determine the net present value of the investment in the paint and body shop.
(Round the
present value factor calculations to 4 decimal places, e.g. 0.2525. Round all other calculations
the final answer to 2 decimal places, e.g. 25.21.)
Net present value
$[no answer]
Should Sonnetson invest in the paint and body shop?
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 Spring '11
 Brown/Lexner
 Net Present Value, Adrian Sonnetson

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