Splash World is considering purchasing a water park in Charlotte, North Carolina, for $ 2,000,000. The new facility will generate annual net cash inflows of $ 520,000 for ten years. Engineers estimate that the facility will remain useful for ten years and have no residual value. The company uses straight- line depreciation. Its owners want payback in less than five years and an ARR of 12% or more. Management uses a 14% hurdle rate on investments of this nature.

1. Compute the payback period, the ARR, the NPV, and the approximate IRR of this ­investment. (If you use the tables to compute the IRR, answer with the closest interest rate shown in the tables.)
2. Recommend whether the company should invest in this project.

  • CreatedAugust 27, 2014
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