Refer to Present Value Tables

question 49

Essay

Refer to Present Value Tables. Monsoon Company is considering an investment that will have an initial cost of $1,000,000 yield annual net cash inflows of $260,000. Yearly depreciation will be $200,000. The equipment is expected to be useful for five years, at which point it will be scrapped with no salvage value. The company requires a minimum rate of return of 10%.
Required:
A. Calculate the accounting rate of return.
B. Calculate the net present value. Is the investment acceptable?
C. Now suppose that the company believes it can sell the equipment at the end of five years for $100,000. Calculate the net present value. Is the investment acceptable?
D. What can you say about the IRR in the first case (no salvage value) versus the IRR in the second case ($100,000 salvage value)?

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Definitions:

Accrued Expense

Expenses that have been incurred but not yet paid or documented in the financial statements.

Electric Bill

A statement that specifies the amount of money charged for the consumption of electricity over a specific period.

Paid

Refers to the settlement of an obligation or receipt of money or goods in exchange for services or goods provided.

Net Book Value

The current value of an asset or a company after subtracting total liabilities from total assets.