Water World is considering purchasing a water park in San Antonio, Texas for $1,850,000. The new facility will generate annual net cash inflows of $520,000 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.

Answer the following, using the data above:

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.)

1. Recommend whether the company should invest in this project.

FN3140 Accounting and Finance for Business Unit 10 Handout: DCF Problems Water World is considering purchasing a water park in San Antonio, Texas for $1,850,000. The new facility will generate annual net cash inflows of $520,000 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. Answer the following, using the data above: 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.) __________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________ 2. Recommend whether the company should invest in this project. __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ __________________________________________________________________________________ ____________________________________________________________________________ 1