Thurman Munster, the owner of Adams Family RVs, is considering the addition of a service center his lot. The building and equipment are estimated to cost $2,000,000, and both the building and equipment will be depreciated over 10 years using the straight-line method. The building and equipment have zero estimated residual value at the end of 10 years. Munster's required rate of return for this project is 12%. Net income related to each year of the investment is as follows.
| Revenue |
$450,000 |
|
| Less: |
|
|
| Material Cost |
$60,000 |
|
| Labor |
100,000 |
|
| Depreciation |
200,000 |
|
| Other |
10,000 |
370,000 |
| Income before taxes |
|
800,000 |
| Taxes at 40% |
|
32,000 |
| Net Income |
$48,000 |
|
(A) Determine the net present value of the investment in the service center. Should Munster invest in the service center?
(B) Calculate the internal rate of return of the investment to the nearest 0.5%.
(C) Calculate the payback period of the investment.
(D) Calculate the accounting rate of return.