Chapter 26, Problem 35BP

Water City is considering purchasing a water park in Omaha, Nebraska, for $1,920,000. The new facility will generate annual net cash inflows of $472,000 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, and its stockholders demand an annual return of 12% on investments of this nature.

Requirements

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