Question

A Company is considering investing in new plant & equipment to introduce new products, life Span 5 yrs. It cost is $1,500,000 and disposal value $250,000. Sale forecast for the product is as follow: Year 1 1,200,000 Year 2 1,680,000 Year 3 3,040,000 Year 4 2,560,000 Year 5 1,920,000 The product is expected Contribution to Sales ratio is 37.5%. Annual incremental fixed cost is $160,000(excluding depreciation). Assume Cost of Capital 15%. Calculate the following. (1) Net cashflows (2) payback period (3)ARR​

Answer 1

Final-Answer:

(1) Net cashflows:

Year 1: $450,000 = $1,200,000 x 37.5% - $160,000

Year 2: $612,000 = $1,680,000 x 37.5% - $160,000

Year 3: $1,126,000 = $3,040,000 x 37.5% - $160,000

Year 4: $968,000 = $2,560,000 x 37.5% - $160,000

Year 5: $768,000 = $1,920,000 x 37.5% - $160,000

(2) Payback period:

$1,500,000 / $450,000 = 3.33 years

(3) ARR:

is ($450,000 + $612,000 + $1,126,000 + $968,000 + $768,000) / $1,500,000 = 1.24 = 124%