стр. 104 
Payback period = 4.167 years
==
$18,000
annual savings
PV = A X PVIFA12%,7yean$18,000 X 4.5638 = $82,148 (rounded)
=
(b)
(4 PV = $3,000 X PVIF1Z%,7yean
= $3,000 X 0.4523 = $1,357 (rounded)
= $82,148 + $1,357 = $83,505
(4 Total PV
= PV  I = $83,505  $75,000 = $8,505
(4 NPV
At IRR, I = PV. Thus,
(f)
$75,000 = $18,000 X PVIFA,7
which is somewhere between 14 percent and 15 percent in the 7year line.
[CHAR 8
222 CAPITAL BUDGETING (INCLUDING LEASING)
Using interpolation,
PVIFA
14Yo 4.2883 4.2883
4.1667
True rate
4.1604
15%
0.1216 0.1279
Difference
0 1216
 = 14%+ 0.95% = 14.95%
= 14%+ (1%)
0.1279
Payback Period and ARR.The JohnintheBox Store is a fast food restaurant chain. Potential
8.5
franchisees are given the following revenue and cost information:
Building and equipment $490,000
Annual revenue $520,000
Annual cash operating costs $380,000
The building and equipment have a useful life of 20 years. The straightline method for
depreciation is used. The income tax is 40 percent. Given these facts: ( a ) What is the payback
period? (6) What is the accounting rate of return?
SOLUTION
Net profits before depreciation and taxes = $S20,000 $380,000 = $140,000
= $24,500
Annual depreciation =
20 years
Therefore,
Net profit after taxes = ($140,000 $24,500)(1 0.4) = $69,300
Aftertax cash inflows = $69,300 + $24,500 = $93,800
Initial investment  $490y000 5.22 years
=
(4 Payback period =
$93,800
annual cash flow
$69,300
net income ==
14.14%
Accounting rate of return =
(b) investment $490,000
or using average investment in the denominator gives:
ARR = $69y300 = 28.28%
$490,000/2
Basic Evaluation Methods. The Rango Company is considering a capital investment for which
8.6
the initial outlay is $20,000.Net annual cash inflows (before taxes) are predicted to be $4,000 for
10years. Straightline depreciation is to be used, with an estimated salvage value of zero. Ignore
income taxes. Compute the: (a) payback period; (6) accounting rate of return (ARR); (c) net
present value (NPV), assuming a cost of capital (before tax) of 12 percent; and (d) internal rate
of return (IRR).
223
CAPITAL BUDGETING (INCLUDING LEASING)
CHAP. 81
SOLUTION
$20,000
initial investment

Payback period = = 5 years
(4 annual cash flow !$4,000/year
net income
Accounting rate of return (ARR) =
initial investment
Depreciation =  $2,000/year
$20,000 =
10 years
Net present value (NPV) = PV of cash inflows [discounted at the cost of capital (12%)]
(4
initial investment
$4,000 X (PVIFA12,,10)  $20,000 = $4,000(5.6502)  $20,000 = $2,600.80
( d ) Internal rate of return (IRR) is the rate which equates the amount invested with the present value
of cash inflows generated by the project.
$20,000 = $4,000(PVIFA,10)
$20,000
PVIFA,, 10 =  =
$4,000
which is between 15 percent and 16 percent in Appendix D.Using interpolation,
PVIFA
5.0188 5.0188
15%
5.0000
True rate
4.8332
16%
Difference 0.0188 0.1856
(5'0188  5.m)  15%)
+ +
= 15% o*0188(1yo)
IRR (16% = 15%
0.1856
5.0188 4.8332

15% + 0.101% = 15.101%
=
стр. 104 