Anonymous

(TCO 9) Thurman Munster, the owner of Adams Family RVs, is considering the addition of a service center his lot. The building and equipment are estimated to cost \$1,100,000 and both the building and equipment will be depreciated over 10 years using the straight-line method. The building and equipment have zero estimated residual value at the end of 10 years. Munster’s required rate of return for this project is 12 percent. Net income related to each year of the investment is as follows:

Revenue \$450,000

Less:

Material cost \$ 60,000

Labor 100,000

Depreciation 110,000

Other 10,000 280,000

Income before taxes 170,000

Taxes at 40% 68,000

Net income \$102,000

(a) Determine the net present value of the investment in the service center. Should Munster invest in the service center?

(b) Calculate the internal rate of return of the investment to the nearest ½ percent.

(c) Calculate the payback period of the investment.

(d) Calculate the accounting rate of return.

Relevance
• Anonymous
8 years ago

Using NPV Calculation tool at http://thinkanddone.com/finance/online-npv-calcula...

DCF0 = -1100000/(1+0.12)^0 = -1100000

DCF1 = 102000/(1+0.12)^1 = 91071.43

DCF2 = 102000/(1+0.12)^2 = 81313.78

DCF3 = 102000/(1+0.12)^3 = 72601.59

DCF4 = 102000/(1+0.12)^4 = 64822.84

DCF5 = 102000/(1+0.12)^5 = 57877.54

DCF6 = 102000/(1+0.12)^6 = 51676.37

DCF7 = 102000/(1+0.12)^7 = 46139.62

DCF8 = 102000/(1+0.12)^8 = 41196.09

DCF9 = 102000/(1+0.12)^9 = 36782.22

DCF10 = 102000/(1+0.12)^10 = 32841.27

NPV = -523677.25

Using IRR Calculation tool at http://thinkanddone.com/finance/online-irr-calcula...

IRR = -1.35%

f(x) = -1100000(1+i)^0 +102000(1+i)^-1 +102000(1+i)^-2 +102000(1+i)^-3 +102000(1+i)^-4 +102000(1+i)^-5 +102000(1+i)^-6 +102000(1+i)^-7 +102000(1+i)^-8 +102000(1+i)^-9 +102000(1+i)^-10

f'(x) = -102000(1+i)^-2 -204000(1+i)^-3 -306000(1+i)^-4 -408000(1+i)^-5 -510000(1+i)^-6 -612000(1+i)^-7 -714000(1+i)^-8 -816000(1+i)^-9 -918000(1+i)^-10 -1020000(1+i)^-11

x0 = 0.1

f(x0) = -473254.1552

f'(x0) = -2692420.6731

x1 = 0.1 - -473254.1552/-2692420.6731 = -0.0757727386158

Error Bound = -0.0757727386158 - 0.1 = 0.175773 > 0.000001

x1 = -0.0757727386158

f(x1) = 513922.1247

f'(x1) = -10727816.1489

x2 = -0.0757727386158 - 513922.1247/-10727816.1489 = -0.0278671707393

Error Bound = -0.0278671707393 - -0.0757727386158 = 0.047906 > 0.000001

x2 = -0.0278671707393

f(x2) = 95471.8589

f'(x2) = -7049928.8782

x3 = -0.0278671707393 - 95471.8589/-7049928.8782 = -0.0143249264813

Error Bound = -0.0143249264813 - -0.0278671707393 = 0.013542 > 0.000001

x3 = -0.0143249264813

f(x3) = 5190.9012

f'(x3) = -6300312.0919

x4 = -0.0143249264813 - 5190.9012/-6300312.0919 = -0.0135010147313

Error Bound = -0.0135010147313 - -0.0143249264813 = 0.000824 > 0.000001

x4 = -0.0135010147313

f(x4) = 17.494

f'(x4) = -6257904.1977

x5 = -0.0135010147313 - 17.494/-6257904.1977 = -0.0134982192189

Error Bound = -0.0134982192189 - -0.0135010147313 = 3.0E-6 > 0.000001

x5 = -0.0134982192189

f(x5) = 0.0002

f'(x5) = -6257760.8996

x6 = -0.0134982192189 - 0.0002/-6257760.8996 = -0.0134982191869

Error Bound = -0.0134982191869 - -0.0134982192189 = 0 < 0.000001

IRR = x6 = -0.0134982191869 or -1.35%

Using Payback period Calculation tool at http://thinkanddone.com/finance/online-payback-per...

N###Net Cash Flows###Cumulative Cash Flows

0###-1100000## -1100000

1###102000## -998000

2###102000## -896000

3###102000## -794000

4###102000## -692000

5###102000## -590000

6###102000## -488000

7###102000## -386000

8###102000## -284000

9###102000## -182000

10###102000## -80000

No payback period exist.

• 3 years ago