Sato Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,400,000. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Cash Expenses Year Cash Revenues $2,980,000 2,980,000 2,980,000 2,980,000 2,980,000 The present value tables provided in Exhibit 19B.1 and Exhibit 19B.2 must be used to solve the following problems. Required: 1. Compute the project's payback period. If required, round your answer to two decimal places. 3.33 years 1 2 3 4 5 $2,260,000 2,260,000 2,260,000 2,260,000 2,260,000 2. Compute the project's accounting rate of return. Enter your answer as a whole percentage value (for example, 16% should be entered as "16" in the answer box). % 3. Compute the project's net present value, assuming a required rate of return of 10 percent. When required, round your answer to the nearest dollar. $ 4. Compute the project's internal rate of return. Enter your answers as whole percentage values. Between 14 % and 16 %
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
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