Capital Investment Decisions
Entertainment World is considering purchasing an amusement park in Blue Ridge Mountain, North Carolina, for $ 1,850,000. The new facility will generate annual net cash inflows of $495,000 for nine years. Engineers estimate that the facility will remain useful for nine years and have no residual value. The company uses straight-line depreciation. Its owners want payback in less than five years and an ARR of 12% or more. Management uses a 10% hurdle rate on investments of this nature
Requirements:
1) Compute the payback period, the accounting rate of return (ARR), the net present value (NPV), and the approximate internal rate of return (IRR) of this investment.
2) Recommend whether the company should invest in this project.