Exercise 2510 (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 straightline 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 

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  15  3.60478  $1,91,053 
Present Value of Cash Inflows (B)  $1,91,053  
Net Present Value (BA)  $5,553 
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