Chapter 7, Problem 7.19P

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

To prepare: The contribution format income statement.

Answer to Problem 7.19P

Income statement is given below:

Explanation of Solution

S. No.	Particular	Amount $	Amount $
A	Sales		300,000
	Less: ingredient 20% of sales		60,000
			240,000
B	Fixed expense
1	Operating cost including salaries	70,000
2	Rent of premises	42,000
3	Insurance	3,500
4	Utilities	27,000
5	Commission	37,500
	Sum of B		180,000
C	Net operating		60,000

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

To compute: The simple rate of return promised by the outlet.

Answer to Problem 7.19P

The simple rate of return promised by the outlet will be 24%

Explanation of Solution

Simple rate of return:

  $\begin{array}{l}simplerateofreturn=\frac{annualincrementalnetoperatingincome}{Initialinvestment-salvage}\\ =\frac{\$60,000}{\$270,000-\$18000}\\ =0.238\\ =24\%\end{array}$

The simple rate of return promised by the outlet will be 24%

To determine

Introduction: The variability between present value of all cash outflow and present value of all cash inflow is known as net present value (NPV). The discount rate at which the net present value is equal to zero is knows as Internal rate of return (IRR). The ratio of income and capital gain is known as simple rate of return.

To compute: The payback period for four years or less will be acquired by Mr. S

Answer to Problem 7.19P

Net present value is $101,723.019

Explanation of Solution

The annual net cash inflow because the annual cash inflow is not given, it must be computed before the payback period can be determined

Net annual cash flow

  $\begin{array}{l}Annualnetcashflow=netoperatingincome+Netcashdeductionsfordepreciation\\ =\$60,000-18,000\\ =\$42,000\end{array}$

The payback period using the annual net cash inflow:

  $\begin{array}{l}investmentrequired=Costofnewequipment-salvagevalueofoldequipment\\ =\$270,000-\$18,000\\ =\$252,000\end{array}$

Payback period

  $\begin{array}{l}Paybackperiod=\text{}\frac{Investmentrequied}{Annualnetcash\inf low}\\ =\frac{\$252,000}{\$60,000}\\ =4.2years\end{array}$

Payback periods is 4.2 years