payback period & net present value

E12-25A (similar to)Question Help  

Morrison Industries is evaluating whether to invest in solar panels to provide some of the electrical needs of its main office building in Charleston​, South Carolina. The solar panel project would cost $500,000 and would provide cost savings in its utility bills of $45,000 per year. It is anticipated that the solar panels would have a life of 15 years and would have no residual value.Read the requirementsLOADING….LOADING… ​(Click the icon to view the present value factor​ table.)LOADING… ​(Click the icon to view the present value annuity factor​ table.)LOADING… ​(Click the icon to view the future value factor​ table.)LOADING… ​(Click the icon to view the future value annuity factor​ table.)Review OnlyLOADING… Click the icon to see the Worked Solution.Requirement 1. Calculate the payback period in years of the solar panel project. Determine the​ formula, then calculate the payback period. ​(Round your answer to two decimal​ places.)

 Initial investment÷Expected annual net cash inflow=Payback period
$500,000÷$45,000=11.11years

Requirement 2. If the company uses a discount rate of 12​%, what is the net present value of this​ project? ​(Round your answer to the nearest whole dollar. Use parentheses or a minus sign for a negative net present​ value.)

The net present value of the project is$(193,505).

Requirement 3. If the company has a rule that no projects will be undertaken that have a payback period of more than five​ years, would this investment be​ accepted? If​ not, what arguments could the energy manager make to try to obtain approval for the solar panel​ project?No because the payback period is more than five years. Select arguments the energy manager could make.

The payback method is only focusing on time, not on profitability.
The payback period is not considering the cash inflows that occur after that period.

Requirement 4. What would you do if you were in charge of approving capital investment​ proposals? ​(If an input field is not used in the​ table, leave the input field​ empty; do not select a​ label.)

 
Determine if the capital investment creates a positive net present value.
Ensure the funds are available for the purchase of the capital investment.

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