National Rodeo Association, a not-for-profit organization, is considering purchasing a new enterprise software system for $75,000. This...
Free
90.2K
Verified Solution
Link Copied!
Question
Accounting
National Rodeo Association, a not-for-profit organization, isconsidering purchasing a new enterprise software system for$75,000. This investment is projected to have an seven-year usefullife, and a salvage value of $10,000; the investment is projectedto save the organization approximately $14,000 each year inoperating costs. In addition to the cost of the software system,the association needs an increase of $6,000 in net working capital(other than cash) in the first year, which will not be released(that is, converted back to cash) until the end of seven years.
Required:
1. What is the payback period for this proposed investment?(Assume that the cash flows, other than salvage value, occur evenlythroughout the year. Round your answer to 2 decimal places, e.g.,2.452 years = 2.45 years.)
2. If the Association has a required rate of return of 9percent, what is the net present value (NPV) of the proposedinvestment? Round your calculation to whole dollars (i.e., zerodecimal points).
National Rodeo Association, a not-for-profit organization, isconsidering purchasing a new enterprise software system for$75,000. This investment is projected to have an seven-year usefullife, and a salvage value of $10,000; the investment is projectedto save the organization approximately $14,000 each year inoperating costs. In addition to the cost of the software system,the association needs an increase of $6,000 in net working capital(other than cash) in the first year, which will not be released(that is, converted back to cash) until the end of seven years.
Required:
1. What is the payback period for this proposed investment?(Assume that the cash flows, other than salvage value, occur evenlythroughout the year. Round your answer to 2 decimal places, e.g.,2.452 years = 2.45 years.)
2. If the Association has a required rate of return of 9percent, what is the net present value (NPV) of the proposedinvestment? Round your calculation to whole dollars (i.e., zerodecimal points).
Answer & Explanation Solved by verified expert
| 1) | ||||
| Initial Investment | ||||
| Cost of new software | $ 75,000 | |||
| Working Capital | $ 6,000 | |||
| Total | $ 81,000 | |||
| Annual cash inflow | $ 14,000.00 | |||
| Payback period = Initial Investment / annual cash inflow | ||||
| =$81000/14000 | ||||
| =5.79 years | ||||
| 2) | Calculation Of NPV | |||
| a | Annual net cash inflow | $ 14,000 | ||
| b | PV Annuity Factor (9%,7 years) | 5.0330 | ||
| c | PV of annual cash flow (a*b) | $ 70,461.34 | ||
| d | Release Of Working Capital | $ 6,000.00 | ||
| e | PV Factor for 7th year | 0.5470 | ||
| f | PV of working capital | $ 3,282.21 | ||
| g | Salvage Value | $ 10,000 | ||
| h | PV Factor for 7th year | 0.54703 | ||
| i | PV of Salvage Value (g*h) | $ 5,470.34 | ||
| j | Initial Investment | $ 81,000 | ||
| k | NPV (c+i+f-j) | $ -1,786 | ||
Get Answers to Unlimited Questions
Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!
Membership Benefits:
- Unlimited Question Access with detailed Answers
- Zin AI - 3 Million Words
- 10 Dall-E 3 Images
- 20 Plot Generations
- Conversation with Dialogue Memory
- No Ads, Ever!
- Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!
Other questions asked by students
StudyZin's Question Purchase
1 Answer
$0.99
(Save $1 )
One time Pay
- No Ads
- Answer to 1 Question
- Get free Zin AI - 50 Thousand Words per Month
Unlimited
$4.99*
(Save $5 )
Billed Monthly
- No Ads
- Answers to Unlimited Questions
- Get free Zin AI - 3 Million Words per Month
*First month only
Free
$0
- Get this answer for free!
- Sign up now to unlock the answer instantly
You can see the logs in the Dashboard.