Required information [The following information applies to the questions displayed below.] Metro Car Washes, Inc. is reviewing an investment proposal. The initial cost as well as the estimate of the book value of the investment at the end of each year, the net after-tax cash flows for each year, and the net income for each year are presented in the following schedule. The salvage value of the investment at the end of each year is equal to its book value. There would be no salvage value at the end of the investment's life. Year 0 1 2 3 4 5 Initial Cost and Book Value $345,000 230,000 138,000 69,000 23,000 Annual Net After-Tax Cash Flows $162,000 141,000 120,000 99,000 78,000 Annual Net Income $47,000 49,000 51,000 53,000 55,000 Management uses a 14 percent after-tax target rate of return for new investment proposals. Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)
Net Present Value
Net present value is the most important concept of finance. It is used to evaluate the investment and financing decisions that involve cash flows occurring over multiple periods. The difference between the present value of cash inflow and cash outflow is termed as net present value (NPV). It is used for capital budgeting and investment planning. It is also used to compare similar investment alternatives.
Investment Decision
The term investment refers to allocating money with the intention of getting positive returns in the future period. For example, an asset would be acquired with the motive of generating income by selling the asset when there is a price increase.
Factors That Complicate Capital Investment Analysis
Capital investment analysis is a way of the budgeting process that companies and the government use to evaluate the profitability of the investment that has been done for the long term. This can include the evaluation of fixed assets such as machinery, equipment, etc.
Capital Budgeting
Capital budgeting is a decision-making process whereby long-term investments is evaluated and selected based on whether such investment is worth pursuing in future or not. It plays an important role in financial decision-making as it impacts the profitability of the business in the long term. The benefits of capital budgeting may be in the form of increased revenue or reduction in cost. The capital budgeting decisions include replacing or rebuilding of the fixed assets, addition of an asset. These long-term investment decisions involve a large number of funds and are irreversible because the market for the second-hand asset may be difficult to find and will have an effect over long-time spam. A right decision can yield favorable returns on the other hand a wrong decision may have an effect on the sustainability of the firm. Capital budgeting helps businesses to understand risks that are involved in undertaking capital investment. It also enables them to choose the option which generates the best return by applying the various capital budgeting techniques.
![Required information
[The following information applies to the questions displayed below.]
Metro Car Washes, Inc. is reviewing an investment proposal. The initial cost as well as the estimate of the book value of
the investment at the end of each year, the net after-tax cash flows for each year, and the net income for each year are
presented in the following schedule. The salvage value of the investment at the end of each year is equal to its book
value. There would be no salvage value at the end of the investment's life.
Year
0
1
2
3
4
5
Initial Cost
and Book Value
$345,000
230,000
138,000
69,000
23,000
0
Annual Net After-Tax
Cash Flows
$162,000
141,000
120,000
99,000
78,000
Annual
Net Income
$47,000
49,000
51,000
53,000
55,000
Management uses a 14 percent after-tax target rate of return for new investment proposals.
Use Appendix A for your reference. (Use appropriate factor(s) from the tables provided.)
Required:
1. Compute the project's payback period. Assume that the cash flows in years 1 through 5 occur uniformly throughout each year.
(Round your answer to 2 decimal places.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fbe32cf96-05c3-411c-b6f9-a1dc10956302%2F95312915-3239-4ed4-956c-a665deac8237%2Fx7th8mk_processed.png&w=3840&q=75)
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