BUSN 379 DVU Payback AAR IRR and NPV Questions

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elna3209

Business Finance

BUSN 379

DeVry University

BUSN

Description

3.Calculating Payback. Global Toys Inc., imposes a payback cutoff of three years for its international investment projects. If the company has the following two projects available, should it accept either of them?YearCash Flow (A)Cash Flow (B)0?$55,000?$ 95,0001    19,000     18,0002    27,000     26,0003    24,000     28,0004      9,000   260,000LO 24.Calculating AAR. You’re trying to determine whether or not to expand your business by building a new manufacturing plant. The plant has an installation cost of $14 million, which will be depreciated straight-line to zero over its four-year life. If the plant has projected net income of $1,253,000, $1,935,000, $1,738,000, and $1,310,000 over these four years, what is the project’s average accounting return (AAR)?

figure

LO 35.Calculating IRR. A firm evaluates all of its projects by applying the IRR rule. If the required return is 11 percent, should the firm accept the following project?YearCash Flow0?$153,0001      78,0002      67,0003      49,000

figure

LO 46.Calculating NPV. For the cash flows in the previous problem, suppose the firm uses the NPV decision rule. At a required return of 9 percent, should the firm accept this project? What if the required return was 21 percent? 

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Explanation & Answer

Hello there,Hope everything is fine. I tried to finish as fast as possible. The only thing which interfered this time was the fact that I had to be on call yesterday so I wasn't able to deliver it anytime earlier than now. Even so, I finished it right now.I am attaching as always two versions of the 4 problems which you requested. I made them "original" but still kept the final answers as there can be only one correct one.I am looking forward to hearing from you. If you need any kind of edits, don't hesitate to text me back.

DeVry University

Business/NPV/aar/payback
Busn379
--------------------------

Problem 3
We will determine the Payback period for Project A and Project B individually and then we
will accept the one which is shorter than 3 years and decline the one who is over 3 years.
Project A
Year

The Cash Flow

The Cumulative Cash Flow

1

$19,000

$19,000

2

$27,000

$46,000

3

$24,000

$70,000

4

$9,000

$79,000

Since we have the table done, we are now going to determine the Payback period value which
interest us.
Payback period =2 +
Payback Period = 2+

𝑇ℎ𝑒 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝑤ℎ𝑖𝑐ℎ 𝑛𝑒𝑒𝑑𝑠 𝑡𝑜 𝑏𝑒 𝑟𝑒𝑐𝑜𝑣𝑒𝑟𝑒𝑑
𝑇ℎ𝑒 𝐶𝑎𝑠ℎ 𝐹𝑙𝑜𝑤 𝑉𝑎𝑙𝑢𝑒 𝑖𝑛 𝑡ℎ𝑒 𝑌𝑒𝑎𝑟 3
55,000−46,000
24,000

∗1

∗1

Payback Period = 2,375 => 2,38 ( which is less than 3 Years)

Project B
Year

The Cash Flow

The Cumulative Cash Flow

1

$18,000

$18,000

2

$26,000

$44,000

DeVry University

3

$28,000

$72,0...


Anonymous
Awesome! Perfect study aid.

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