Problem:
Generic Motors Corporation is planning to invest $250,000 in year zero (today) in new equipment. This investment is expected to generate net cash flows of $100,000 a year for the next 4 years (years 1-4). The salvage value after 4 years is zero. The discount rate (cost of capital) is 20% a year.
Required:
a) What is the net present value (NPV) of this project?
NPV = $__________________
Should the firm invest, based on NPV? (1=yes, 2=no) ________________
b) What is the payback period for this project?
payback period = _________________ years
c) What is the modified payback period for this project?
-between 1 and 2 years
-between 2 and 3 years
-between 3 and 4 years
d) What is the accounting rate of return (ARR) for this project?
To compute ARR, first compute:
annual depreciation=$_____________
annual income=$______________
average investment=$____________
ARR = ______________ % (enter say 10% as 10, not as 0.1 and not as 10%)