Question

Exercise 12-10 (Video) Vilas Company is considering a capital investment of $197,600 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 $15,314 and $52,000, respectively. Vilas 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

(a)-Cash Payback Period

Cash Payback Period = Initial Investment / Annual Net Cash Inflow

= $197,600 / $52,000

= 3.80 Years

(b)-Annual Rate of Return

Annual Rate of Return = [Net Income / Average Investment] x 100

= [$15,314 / ($197,600 / 2)] x 100

= [$15,314 / 98,800] x 100

= 15.50%

(c)-Net Present Value

Net Present Value = Present Value of annual cash inflows – Initial Investment

= $52,000[PVIFA 12%, 5 Years] - $197,600

= [$52,000 x 3.60482] - $197,600

= $187,451 - $197,600

= -$10,149 (Negative NPV)