Cooper Automotive is considering expanding, but to do so, they need to invest in new systems expected to cost $1,000,000. They estimate the salvage value to be $0 at the end of 10 years, so depreciation will be $100,000 per year. They estimate that profits will increase by $250,000 per year. Coop's cost of capital is 10%.Required: Compute the payback period, the accounting rate of return, the net present value, and the internal rate of return. Advise Coop on whether he should invest. Would your advice change if the increase in profits is only $175,000 per year?
What will be an ideal response?
At $250,000 annual incremental profit:
Payback is 4 years;
ARR is 15%;
NPV is ~$500,000;
IRR is 21%.
Invest
At $175,000 annual incremental profit:
Payback increases to almost 6 years;
ARR drops to 7.5%;
NPV decreases to ~$75,000;
IRR decreases to 12%.
Advise evaluating the sensitivity of the estimates to changes in assumptions.
You might also like to view...
If a company sells its bonds at more than face value, the effective interest rate is
A) less than the contract interest rate. B) more than the contract interest rate. C) less than the yield rate. D) more than the yield rate.
Answer the following statements true (T) or false (F)
The essence of SFAS No. 142 is that goodwill must now be amortized over 40 years.
Generally Accepted Accounting Principles (GAAP) is a set of principle-based accounting standards
established by the Financial Accounting Standards Board (FASB). Indicate whether the statement is true or false
All of the following are issues facing Pinterest except:
A. copyright infringement. B. inability to retain users. C. spam. D. scams.