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Calculate the payback period for the proposed investment

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Reference no: EM132385665

Question

Basic concepts: cash payback period, annual rate of return, net present value, internal rate of return.

Gordon Ltd is considering investing in new factory equipment, at a cost of $360,000. The equipment would have a useful life of six years with no scrap or residual value.

The straight-line method of depreciation will be applied. It is expected that the equipment will generate net annual cash inflows of $80,000 per year. Gordon Ltd has an 8% cost of capital and this is the required rate of return for all proposed investments.

Note: company taxation may be ignored.

Requirements

(a) Calculate the payback period for the proposed investment.

(b) Calculate the annual rate of return for the proposed investment.

(c) Calculate the net present value for the proposed investment.

(d) Estimate the internal rate of return for the proposed investment.

(e) Is the proposed investment acceptable?

Reference no: EM132385665

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