Anonymous
Anonymous asked in Business & FinanceOther - Business & Finance · 8 years ago

accounting question please help!!?

(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.

3 Answers

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  • Anonymous
    8 years ago
    Favorite Answer

    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.

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