Splash City is considering purchasing a water park in Atlanta, Georgia, for $1,910,000. The new facility will generate annual net cash inflows of $472,000 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, and its stockholders demand an annual return of 10% on investments of this nature.

Requirement 1. Compute the payback, the ARR, the NPV, the IRR, and the profitability index of this investment.

First, determine the formula and calculate payback. (Round your answer to one decimal place, X.X.)

	/		=	Payback
	/		=		years

Next, determine the formula and calculate the accounting rate of return (ARR). (Round the percentage to the nearest tenth percent, X.X%.)

	/		=	ARR
	/		=		%

Calculate the net present value (NPV). (Enter any factor amounts to three decimal places, X.XXX.)

		Net Cash	Annuity PV Factor	Present
Years		Inflow	(i=10%, n=8)	Value
1 - 8	Present value of annuity
0	Investment
	Net present value of the investment

The IRR (internal rate of return) is between

12-14%

14-16%

16-18%

18-20%

.

Finally, determine the formula and calculate the profitability index. (Round your answer to two decimal places, X.XX.)

	/		=	Profitability index
	/		=

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

Recommendation:

Splash CitySplash City

should

shoud not

invest in the project because the payback period is

greater than

less than

the operating life, the NPV is

negative

positive

, the profitability index is

greater than

less than

one, and the ARR and IRR are

greater than

less than

the company's required rate of return.