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.

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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
 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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