F#19

Water Planet

is considering purchasing a water park in

San Diego, California,

for

$2,100,000.

The new facility will generate annual net cash inflows of

$525,000

for

eight

years. Engineers estimate that the facility will remain useful for

eight

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.

.

Requirement 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.) (Round the payback period to one decimal place.)

The payback period (in years) is

.

(Round the percentage to the nearest tenth percent.)

The ARR (accounting rate of return) is

%.

(Round your answer to the nearest whole dollar.)

Net present value

The IRR (internal rate of return) is between

16% and 18%

20% and 22%

22% and 24%

18% and 20%

.

Requirement 2. Recommend whether the company should invest in this project.

Recommendation:

Do not invest in the new facility.

Invest in the new facility.