Question

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 l0years.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 ............ 153,000
Depreciation ....... 80,000
Other ............ 10,000
Income before taxes .... 190,000
Taxes at 40% ........ 75,000
Net income ........ $114000

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.
d. Calculate the accounting rate of return.



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  • CreatedSeptember 23, 2013
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