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    Capital budgeting decisions - NPV, IRR, ARR, Pay Back period

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    Given the following information:
    Investment: $ 420,000
    Estimated useful life: 7 years.
    Straight line depreciation with no salvage value
    Annual cash savings $ 100,000

    1. Calculate the accounting rate of return on initial investment year 1 only.
    2. Calculate the payback period.
    3. Calculate the Internal rate of return.
    4. Calculate the net present value using a cost of capital of 14 %.
    5. Calculate the after tax Net Income and after tax cash flow assuming a tax rate of 35%

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    Solution Preview

    See the attached file for complete help. The symbols and tables may not print here correctly. Thanks.

    Investments $420,000
    Estimated useful Life 7 Years
    Depreciation SL
    Salvage Value 0
    Annual Cash Savings $100,000
    Tax Rate 35%

    Project A
    Year Investment Annual Cash ...

    Solution Summary

    Illustrates how to calculate the pre-tax and post tax cash flows, accounting rate of return, payback period, internal rate of return and net present value for a project. The solutions is presented in Excel file so that students can understand the formulas used and can play around with numbers to see changes in the final values if any of the input values change.