Thurman Munster, the owner of Adams Family RVs, is considering the addition of a service center his lot. The building and equipment are estimated to cost $1,200,000, and both the building and equipment will be depreciated over 10 years using the straight-line method. The building and equipment have zero estimated residual value at the end of 10 years. Munsters required rate of return for this project is 12%. Net income related to each year of the investment is as follows.
Revenue $450,000
Less:
Material Cost: $60,000
Labor: 100,000
Depreciation: 120,000
Other: 10,000 290,000
Income before taxes 160,000
Taxes at 40% 64,000
Net Income $96,000
(A) Determine the net present value of the investment in the service center. Should Munster invest in the service center?
(B) Calculate the internal rate of return of the investment to the nearest 0.5%.
(C) Calculate the payback period of the investment.
(D) Calculate the accounting rate of return.