Question

# Exercise 25-10 (Video) Bramble Company is considering a capital investment of \$185,500 in additional productive facilities....

Exercise 25-10 (Video)

Bramble Company is considering a capital investment of \$185,500 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be \$12,614 and \$53,000, respectively. Bramble has a 12% cost of capital rate, which is the required rate of return on the investment.

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(a)

Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.)

 Cash payback period years

Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.52%.)

 Annual rate of return %

(b)

Using the discounted cash flow technique, compute the net present value. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer for present value to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

 Net present value

#### Homework Answers

Answer #1

Solution a:

cash payback period = Initial investment / Annual cash flow =\$185500/ 53000 = 3.5 years

Annual rate of return = Average annual income / Average investment

= \$12614/ (\$185500/2) = 13.60%

Solution b:

 Particulars Amount Period PV Factor Present Value Cash Outflows: Cost of Equipment \$1,85,500.00 0 1 \$1,85,500 Present Value of Cash Outflows (A) \$1,85,500 Cash Inflows: Annual cash inflows \$53,000.00 1-5 3.60478 \$1,91,053 Present Value of Cash Inflows (B) \$1,91,053 Net Present Value (B-A) \$5,553
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