Chapter 26, Problem 26WPCP

(a)

To determine

Annual rate of return:

Annual rate of return can be expressed as expected annual net income divided by average investment. Expected annual net income is obtained from projected income statement and average investment can be calculated using the statement of financial position.

Cash payback:

Cash payback technique basically tells the length of time in which original investment will be recovered. It is the method which is used to determine the total time period required to recover the initial cost of a capital investment of a project in terms of the net annual cash flow generated by the specific investment. The formula for cash payback technique is as follows.

$\text{Payback}\text{period}=\frac{\text{Cost}\text{of}\text{capital}\text{investment}}{\text{Net}\text{annual}\text{cash}\text{flows}}$

Net Present Value:

The Net Present Value (NPV) method can be defined as the method through which the net cash flows are discounted based on a specific discount factor to their present value. Once the discounted amount is determined, it is then compared with the present value with the total capital invested initially in the project. The difference between these two values is termed as the net present value (NPV).

To determine: The annual rate of return.

(b)

To determine

The cash payback period.

(c)

To determine

The net present value.

(d)

To determine

The net present value using a discount rate of 15%.