Aquatic Fun is considering purchasing a water park in Cleveland, Ohio for $2,500,000. The new facility will generate annual net cash inflows of $625,000 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 10% or more. Management uses a 12% hurdle rate on investments of this nature.
Requirements
1. Compute the payback period, the ARR, the NPV, and the approximate IRR of this investment.
2. Recommend whether the company should invest in this project.