Basic concepts: cash payback period, annual rate of return,net present value, internal rate of return

Gordon Ltd is considering investing in new factory equipment, at a cost of $360,000.The equipment would have a useful life of six years with no scrap or residual value.The straight-line method of depreciation will be applied.It is expected that the equipment will generate net annual cash inflows of $80,000 per year.Gordon Ltd has an 8% cost of capital and this is the required rate of return for all proposed investments.

Note: company taxation may be ignored.

Requirements

(a)Calculate the payback period for the proposed investment.

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(b)Calculate the annual rate of return for the proposed investment.

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(c)Calculate the net present value for the proposed investment.

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(d)Estimate the internal rate of return for the proposed investment.

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(e)Is the proposed investment acceptable?

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