Question

Vilas Company is considering a capital investment of $186,200 in additional productive facilities. The new machinery...

Vilas Company is considering a capital investment of $186,200 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 $17,689 and $49,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.

Click here to view the factor 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

Homework Answers

Answer #1
Answer
Explanation :
Capital investment   $1,86,200
Annual net income $   17,689
Net annual cash flows $   49,000
Cost of capital 12%
Useful life   5 Years
Average Investment = (Capital investment + Salvage Value)/2
= $186,200 / 2
= $93,100
1) Cash Payback Period = Capital investment / Net annual cash flows
= $186,200 / $49000
= $3.80
2) Annual Rate of Return = Annual Net Income/Average Investment
= $17,689 / $93,100
= 19%
3) Net Present Value = - Capital investment + Net annual cash flows *PVIFA(rate,nper)
= -$186,200 + $49,000(3.60478)
= -$186,200 + $1,76,634
= -$9,566
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