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Capital investment decisions

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Capital Investment Decisions

Entertainment World is considering purchasing an amusement park in Blue Ridge Mountain, North Carolina, for $ 1,850,000. The new facility will generate annual net cash inflows of $495,000 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. Management uses a 10% hurdle rate on investments of this nature

Requirements:

1) Compute the payback period, the accounting rate of return (ARR), the net present value (NPV), and the approximate internal rate of return (IRR) of this investment.

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

Verified Expert

In this solution we have calculated the NPV, ARR payback period and IRR of the project. The calculated are is more than the expected arr so the project is accepted.

Reference no: EM13825753

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