Question

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.

Click here to view PV table.

(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

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