Chapter IE, Problem 7IE

1

To determine

Net present value NPV helps in determining the profitability of an investment option. It is calculated by deducting present value of outflow from present value of all the inflows.

To calculate: Net present value of the given investment opportunity.

2

To determine

Annual margin It is calculated by the division of net income earned and sales. It is shown as a percentage.

Turnover Turnover is calculated by the division of sales value and investment value.

Return on investment ROI is calculated by the division of net profit and investment value. It measures the income generated or loss incurred on an investment.

To calculate:Amount of free cash flow.

3

To determine

Residual income Residual income is calculated by deducting the required return from the annual income.

To calculate:Amount of residual income that can be earned from the given investment opportunity.

4

To determine

Return on investment ROI is calculated by the division of net profit and investment value. It measures the income generated or loss incurred on an investment.

Required rate of return

This is the minimum rate that an investor expects to earn from an investment.

To explain:Whether store manager would choose to pursue this investment opportunity and whether company would recommend store manager to pursue it.

5

To determine

Present value of residual income Present value of residual income is computed by multiplying the amount of residual income with the present value factor which is based on the interest rate.

Present value of residual income from year 1 to 3. Whether the present value of residual income is greater than the NPV.