Financial Statement Analysis Portfolio
The Income Statement for Pumpkin Co. is shown below:
Pumpkin Co.
Income Statement
for the Month Ended October 21, 2010
revenues
sales
$120,000.00
operating expenses
salary expense
$10,000.00
supplies expense
$14,000.00
depreciation expense
$4,000.00
net income
$92,000.00
Pumpkin Co. is about to embark on a project that will have a total cost of $300,000.00 over a 10-year period.
Calculate the expected annual rate of return on this project.
Calculate the cash payback on this project.
I got 10.67 for annual rate of return but i know its wrong.
To calculate the expected annual rate of return on a project, we need to consider the future cash flows from the project and compare them to the total investment. Here's how you can calculate it:
1. Calculate the annual profit or cash flow from the project: In this case, Pumpkin Co. is investing $300,000.00 over a 10-year period. To calculate the annual cash flow, divide the total cost by the number of years: $300,000.00 / 10 = $30,000.00.
2. Calculate the expected net income: Use the income statement provided to calculate the net income for the project. In this case, the net income is stated as $92,000.00.
3. Calculate the expected annual rate of return: Divide the expected net income by the annual profit or cash flow from the project, and multiply by 100 to express it as a percentage: ($92,000.00 / $30,000.00) * 100 = 306.67%.
Therefore, the expected annual rate of return on this project is approximately 306.67%.
Now let's move on to calculating the cash payback period:
The cash payback period represents the amount of time it takes for the project's cash inflows to equal the initial investment. Here's how to calculate it:
1. Divide the initial investment by the annual profit or cash flow from the project: $300,000.00 / $30,000.00 = 10 years.
Therefore, the cash payback period for this project is 10 years.
Based on the calculations, the expected annual rate of return is approximately 306.67% and the cash payback period is 10 years.