Is considering purchasing a water park in charlotte, north carolinaâ, for $2,000,000. the new facility will generate annual net cash inflows of $520,000 for ten years. engineers estimate that the facility will remain useful for ten years and have no residual value. the company usesâ straight-line depreciation. its owners want payback in less than five years and an arr of 12â% or more. management uses a 14â% hurdle rate on investments of this nature?

Question

Harold Morales

Business

3 May, 10:45

Is considering purchasing a water park in charlotte, north carolinaâ, for $2,000,000. the new facility will generate annual net cash inflows of $520,000 for ten years. engineers estimate that the facility will remain useful for ten years and have no residual value. the company usesâ straight-line depreciation. its owners want payback in less than five years and an arr of 12â% or more. management uses a 14â% hurdle rate on investments of this nature?

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Ryan Chang · Answer 1

Given:

initial investment 2,000,000.

the new facility will generate annual net cash inflows of $520,000 for ten years.

engineers estimate that the facility will remain useful for ten years and have no residual value.

Payback period = Initial Investment / Cash Inflow per period

Payback period = 2,000,000 / 520,000

Payback period = 3.85 years or 3 years and 10 months.

Accounting Rate of Return (ARR) = Average Annual Profit / Average Annual Investment

Average annual profit = 520,000

Average annual investment = 2,000,000 / 10 years = 200,000

ARR = 520,000 / 200,000 = 2.60 or 260%

NPV = 520,000 * [ (1 - (1.14) ⁻¹⁰ / 0.14) ] - 2,000,000

NPV = 520,000 * 5.216 - 2,000,000

NPV = 2,712,320 - 2,000,000

NPV = 712,320