River Wild is considering purchasing a water park in , for . The new facility will generate annual net cash inflows of for years. Engineers estimate that the facility will remain useful for 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 % or more. Management uses a % hurdle rate on investments of this nature. Based on your reading, complete the given tasks:

a. Compute the payback period, the ARR, the NPV, and the approximate IRR of this investment.
b. Recommend whether the company should invest in this project?

The numbers are missing, so I looked for a similar question:

River Wild is considering purchasing a water park in Oakland, California, for $2,000,000. The new facility will generate annual net cash inflows of $510,000 for nine years. Engineers estimate that the facility will remain useful for nine 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 12% or more. The management uses a 10% hurdle rate on investments of this nature.

a) Payback period = $2,000,000 / $510,000 = 3.92 years

ARR = net income / initial outlay

net income = net cash flow - depreciation expense = $510,000 - ($2,000,000/9) = $510,000 - $222,222 = $287,778

ARR = $287,778 / $2,000,000 = 0.1439 = 14.39%

NPV = -$2,000,000 + [$510,000 x 5.7590 (PV annuity factor, 10%, 9 periods)] = $937,090

using a financial calculator, the IRR = 20.87%

b) Since the NPV is positive, the payback period is less than 5 years, and the ARR is higher than expected, the project should be carried out.

answer utilities; more money you have to pay out ; )

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