Polycorp is considering an investment in new plant of $3.15 million. The project will be partially financed with a loan of $2,000,000 which will be repaid over the next five years in equal annual end of year instalments at a rate of 6.25 percent pa. Assume straight-line depreciation over a five-year life, and no taxes. The projects cash flows before loan repayments and interest are shown in the table below. Cost of capital is 12.65% pa (the required rate of return on the project). A salvage value of $255,000 is expected at the end of year five and is included in the cash flows for year five below. Ignore taxes and inflation. Year Year One Year Two Year Three Year Four Year Five Cash Inflow 890,000 830,000 815,000 910,000 1045,000 You are required to calculate: (4) AE, the annual equivalent for the project (AE or EAV) (to the nearest dollar) (5) PB, the payback and discounted payback in years (to one decimal place) (6) ARR, the accounting rate of return (gross and net) (to two decimal places)
Polycorp is considering an investment in new plant of $3.15 million. The project will be
partially financed with a loan of $2,000,000 which will be repaid over the next five years in
equal annual end of year instalments at a rate of 6.25 percent pa. Assume straight-line
depreciation over a five-year life, and no taxes. The projects
and interest are shown in the table below. Cost of capital is 12.65% pa (the required
return
included in the cash flows for year five below. Ignore taxes and inflation.
Year Year One Year Two Year Three Year Four Year Five
You are required to calculate:
(4) AE, the annual equivalent for the project (AE or EAV) (to the nearest dollar)
(5) PB, the payback and discounted payback in years (to one decimal place)
(6) ARR, the accounting rate of return (gross and net) (to two decimal places)
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