Chapter 12, Problem 12.61BP

Evaluate an investment using all four methods (Learning Objectives 2 & 4)

Lazy River World is considering purchasing a water park in Chattanooga, Tennessee, for $1,950,000. The new facility will generate annual net cash inflows of $505,000 for eight years. Engineers estimate that the facility will remain useful for eight years and have no residual value. The company uses straight-line depreciation. Its owners want payback in less than five years and an ARR of 10% or more. Management uses a 14% hurdle rate on investments of this nature.

Requirements

1. 1. Compute the payback period, the ARR, the NPV, and the approximate IRR of this investment.
2. 2. Recommend whether the company should invest in this project.