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Category > Accounting Posted 25 Sep 2017 My Price 9.00

Board of Grudgework Holdings

(Interpreting ARR, Payback, and NPV) The Board of Grudgework Holdings has received a presentation supporting a $600,000 capital investment. The calculations for accounting rate of return, payback, and discounted cash flows are shown below.

Accounting Rate of Return	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Initial investment	$600,000
Depreciation @ 20%		$120,000	$120,000	$120,000	$120,000	$120,000
Book value at year-end		480,000	360,000	240,000	120,000	0
Cash flows		150,000	250,000	200,000	150,000	100,000
Profit		30,000	130,000	80,000	30,000	(20,000)
ARR		6.3%	36.1%	33.3%	25.0%
Average profits	$ 50,000
Average investment	300,000
Average ARR	16.7%

Payback	Year 0	Year!	Year 2	Year 3	Year 4	Year 5
Initial investment	$(600,000)
Cash flows		$150,000	$250,000	$200,000	$150,000	$100,000
Cumulative cash flow		150,000	400,000	600,000
Payback				= 3 years
Net Present Value	Year 0	Year!	Year 2	Year 3	Year 4	Years

Cash flows	$(600,000)	$150,000	$250,000	$200,000 $150,000 $100,000
Net present value @ 8%	$90,303

What issues would you draw to the attention of the board in considering these figures?

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Maurice Tutor

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Status NEW Posted 25 Sep 2017 05:09 PM My Price 9.00

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