Net Cashflows
Yr 1 = £110,000 Payback = Yr 3 = £425,000 need to find a further £75,000 from
Yr 2 = £125,000 Yr 4. Divide £135,000/12 months = £11,250. Then
Yr 3 = £190,000 £75,000/£11,250 = 6.66 months. Answer = 3 yrs 7 months.
Yr 4 = £135,000 ARR = £670,000 minus £500,000 = £170,000 profit,
Yr 5 = £110,000 To find the average annual rate of return divide £170,000/5yrs
Total = £670,000 = £34,000/500,000 * 100 = 6.8% ARR (is this good enough?).
NPV = £534,600 minus £500,000 = + £34,600 which is good, its positive, but are there any other projects that could provide a higher return, and is the discount factor we have used appropriate.
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