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Problem 9-7 Net Present Value, Internal Rate of Return, Payback, Accounting Rate of Return, and Taxes

Problem 9-7 Net Present Value, Internal Rate of Return, Payback, Accounting Rate of Return, and Taxes
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ACCOUNTING

MT425 / MT 425
Managerial Finance and Accounting
Kaplan University (KU Campus)

James Jiambalvo
Managerial Accounting, 4e
Hoboken, NJ: John Wiley & Sons.

Unit 7: Capital Budgeting and Other Long-Run Decisions

Chapter 9 Problem 9-7 Net Present Value, Internal Rate of Return, Payback, Accounting Rate of Return, and Taxes [LO 2, 3, 4, 6] Adrian Sonnetson, the owner of Adrian Motors, is considering the addition of a paint and body shop to his automobile dealership. Construction of a building and the purchase of necessary equipment is estimated to cost $800,000, and both the building and equipment will be depreciated over 10 years using the straight-line method. The building and equipment have zero estimated residual value at the end of 10 years. Sonnetson’s required rate of return for this project is 12 percent. Net income related to each year of the investment is as follows:

Revenue $500,000
Less:
Material cost 70,000
Labor 150,000
Depreciation 80,000
Other 10,000
Income before taxes 190,000
Taxes at 40% 76,000
Net income $114,000

Required
a. Determine the net present value of the investment in the paint and body shop. Should Sonnetson invest in the paint and body shop?
b. Calculate the internal rate of return of the investment (approximate).
c. Calculate the payback period of the investment.
d. Calculate the accounting rate of return.

 

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