$2+$D$7$:L$19.$ Blink $281$ Corporation is considering an investment that will cost $$170,000$ and last for five years. The investment will be amortized on a straight$-$line basis over that period. Earnings generated by the investment before amortization and taxes over this period are as follows:

Year Earnings before amortization & taxes After$-$tax cash flows

$146000$ $$38,000$

$24900043,000$

$35800050,000$

$46000052,000$

$56500058,000$

Blink $281$ Corporation has a tax rate of $25$ percent.

a$.$ What is the AAR of this project?

b$.$ Compute the payback period in years, and the internal rate of return for the project

c$.$ Compute net present value of the project if WACC is $10$ percent.

d$.$ Should the project be undertaken if the investor expects $15\%$ AAR and $4$ years of payback? What is the decision if you use NPV and IRR as the decision criteria?

Questions $($a$)$: AAR Calculation

Year Earnings before amortization & taxes Amortization Earnings before taxes Taxes Earnings After Tax

$1$ $$46,000\mathrm{.}00$ $$34,000$ $$12,000$ $$3,000$ $$9,000$

$2$ $$49,000\mathrm{.}00$ $$34,000$ $$15,000$ $$3,750$ $$11,250$

$3$ $$58,000\mathrm{.}00$ $$34,000$ $$24,000$ $$6,000$ $$18,000$

$4$ $$60,000\mathrm{.}00$ $$34,000$ $$26,000$ $$6,500$ $$19,500$

$5$ $$65,000\mathrm{.}00$ $$34,000$ $$31,000$ $$7,750$ $$23,250$

Average Earnings $$16,200$

Calculating Average Investment Book Value

Year Amortization Net Book Value

$0$ $$0$ $$0$

$1$ $$34,000$ $$12,000$

$2$ $$34,000$

$3$ $$34,000$

$4$ $$34,000$

$5$ $$34,000$

Average Investment Book value $$19$

Average Accounting Return $19\mathrm{.}06\%$

Question $($b$)$ Computing Payback Period In Years & IRR

Year After$-$tax Cash Flow Cummulative Cash Flow

$0-$$$170,000$

$1$ $$38,000$

$2$ $$43,000$

$3$ $$50,000$

$4$ $$52,000$

$5$ $$58,000$

Number of Full Years Payback

Partial Years

Payback Period Years

Internal rate of Return

Question $($c$)$ Computeing Net Present Value

Year After$-$tax Cash Flow Present Value

$0-$$$170,000$

$1$ $$38,000$

$2$ $$43,000$

$3$ $$50,000$

$4$ $$52,000$

$5$ $$58,000$

Net Present value

Question $($d$)$ Discuss whether or not this project should be undertaking based on AAR, Payback, IRR and NPV calculations above indicate the decision and why you chose that course of action

Based on AAR

Based on Payback

Based on IRR

Based on NPV