Data Table 1000000 Year 2 Year 4 2500000 Year 5 SolutionAns

Data Table $ 1,000,000 Year 2 Year 4 $2,500,000 Year 5

Solution

Answer a.

Company will recover $7,000,000 in first 4 years and remaining $2,000,000 in 5^th year.

Payback Period = Year before full recovery + Unrecovered cost at start of the year / Cash flow during the year
Payback Period = 4 + $2,000,000 / $3,500,000
Payback Period = 4.57 years

Answer b.

Average Annual Income = ($1,000,000 + $1,500,000 + $2,000,000 + $2,500,000 + $3,500,000 + $4,500,000) / 6
Average Annual Income = $2,500,000

Accounting Rate of Return = Average Annual Income / Initial Investment
Accounting Rate of Return = $2,500,000 / $9,000,000
Accounting Rate of Return = 27.78%

Answer c.

The payback period is less than five years. The ARR is greater than 10%. Therefore, Sonoma should accept the solar panel investment.