Respuesta :
Solution:
a. Since annual net revenue increase is equivalent i.e. any duration of the same cash flow), the plan payback period can be determined with the following formula:
[tex]\bold{Payback \ period = \frac{Investment \ required}{Net \ annual \ cash \ inflow}}[/tex]
[tex]\Rightarrow \frac{\$225,000}{\$40,700}[/tex]
[tex]\Rightarrow 5.5 years[/tex]
The simple payback period for the lights is 5.5years
b. See the inner Return Factor value (5.5) for the current Return Factor of 15 years for [tex]\$1[/tex] panel. After this factor has been located see the corresponding Rate of Interest, It is [tex]16\%[/tex].
c. The conclusion is both Part (a) and Part (b).
Answer:
(a) investment in LED=$225,000
Annual savings in electricity and routine maintenance =$40,700
Simple Payback Period =Investment Outlay = $225,000 =5.528 years
Annual Savings $40,700
(b) The IRR of this investment= rα+ NPVα (rβ-rα)
(NPVα-NPVβ)
Where IRR is Internal Rate of Return
NPV stand for Net Present Value
rα=Lower discount rate chosen
rβ= Higher discount rate chosen
NPVα= NPV at rα
NPVβ= NPV at Rβ
DCF stands for Discount Factor.
Calculation of NPVα & NPVβ
Year $ DCF@10% PV DCF@15% PV
0 (225,000) 1 (225,000) 1 (225,000)
1-15 40,700 4.1772 170,014 8.1371 331,178.41
(54,986) 106,178.41
rα=10% ; rβ=15% ; NPVα= (54,986); NPVβ=106,178.41
IRR=10%+ (54,986) (15%-10%) =0.1+ (0.3412)(0.5)=0.2705=27.05%
(54,986)-106,178.41
IRR=27.05%
(c) Conclusions:
Part (a): The payback calculated above is 5 years and 6 months. This did not meet payback period of three years or less desirable by the investor.
Part (b): IRR of 27.05% should be compared with the firm cost of capital. If firm cost of capital is lower than 27.05%, the project should be accepted otherwise, it should rejected.
Explanation:
Payback period means the time required to get back money spent on an investment through annual savings or cash inflow.
Internal Rate of Return (IRR) refers to the interest rate at which the net present value of all the cash flows from an investment equal zero.
