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Capital Budgeting-NPV,IRR, Payback period

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11. A&B Enterprises is trying to select the best investment from among four alternatives. Each alternative requires an initial outlay of $100,000. Their cash flows are as follows:

Project A
Year 1: $10,000
Year 2: $20,000
Year 3: $30,000
Year 4: $40,000
Year 5: $50,000

Project B
Year 1: $50,000
Year 2: $40,000
Year 3: $30,000
Year 4: $0
Year 5: $0

Project C
Year 1: $25,000
Year 2: $25,000
Year 3: $25,000
Year 4: $25,000
Year 5: $25,000

Project D
Year 1: $0
Year 2: $0
Year 3: $45,000
Year 4: $55,000
Year 5: $60,000

Evaluate and rank each of the four projects based on (a) payback period, (b) net present value (use a 10% discount rate), and (c) internal rate of return. You will have to use Excel or a financial calculator to determine the IRR. You are welcome to use Excel or a financial calculator to determine the NPV.

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The solution ranks 4 projects based on (a) payback period, (b) net present value (using a 10% discount rate), and (c) internal rate of return.

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Capital Budgeting: Net present value(NPV), internal rate of return (IRR), payback period, accounting rate of return

The owner of a motor company is considering the addition of a paint and body shop to his auto dealership. Construction of a building and the purchase of necessary equipment is estimated to cost $1,000,000 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. The owners required rate of return for this project is 12%. Net income related to each year of the investment is as follows:

Revenue: $420,000
Less:
Material Cost 65,000
Labor 140,000
Depreciation 70,000
Other 5,000
Income before taxes 140,000
Taxes at 40% 56,000
Net Income 84,000

a. Determine the net present value of the investment in the paint and body shop. Should the owner invest in the paint and body shop?

b. Calculate the internal rate of return of the investment (approximate).

c. Calculate the payback period of the investment.

d. Calculate the accounting rate of return.

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