Question

Hearne Company has a number of potential capital investments. Because these projects vary in nature, initial investment, and time horizon, management is finding it difficult to compare them. Assume straight line depreciation method is used. Project 1: Retooling Manufacturing Facility This project would require an initial investment of $5,300,000. It would generate $946,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,108,000. Project 2: Purchase Patent for New Product The patent would cost $3,715,000, which would be fully amortized over five years. Production of this product would generate $631,550 additional annual net income for Hearne. Project 3: Purchase a New Fleet of Delivery Trucks Hearne could purchase 25 new delivery trucks at a cost of $160,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,900. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $680,000 of additional net income per year. Required: 1. Determine each project's accounting rate of return. (Round your answers to 2 decimal places.) 2. Determine each project's payback period. (Round your answers to 2 decimal places.) 3. Using a discount rate of 10 percent, calculate the net present value of each project. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Round your intermediate calculations to 4 decimal places and final answers to 2 decimal places.) 4. Determine the profitability index of each project and prioritize the projects for Hearne. (Round your intermediate calculations to 2 decimal places. Round your final answers to 4 decimal places.)

Answer #1

Hearne Company has a number of potential capital investments.
Because these projects vary in nature, initial investment, and time
horizon, management is finding it difficult to compare them. Assume
straight line depreciation method is used.
Project 1: Retooling Manufacturing Facility
This project would require an initial investment of $5,250,000. It
would generate $937,000 in additional net cash flow each year. The
new machinery has a useful life of eight years and a salvage value
of $1,096,000.
Project 2: Purchase Patent...

Hearne Company has a number of potential capital investments.
Because these projects vary in nature, initial investment, and time
horizon, management is finding it difficult to compare them. Assume
straight line depreciation method is used.
Project 1: Retooling Manufacturing Facility
This project would require an initial investment of $4,950,000. It
would generate $883,000 in additional net cash flow each year. The
new machinery has a useful life of eight years and a salvage value
of $1,024,000.
Project 2: Purchase Patent...

Problem 10-3
MIRR
A project has an initial cost of $42,875, expected net cash
inflows of $12,000 per year for 9 years, and a cost of capital of
12%. What is the project's MIRR? Round your answer to two decimal
places.
Problem 10-7
NPV
Your division is considering two investment projects, each of
which requires an up-front expenditure of $17 million. You estimate
that the investments will produce the following net cash flows:
Year
Project A
Project B
1
$ 5,000,000...

A company has a 12% WACC and is considering two mutually
exclusive investments (that cannot be repeated) with the following
cash flows:
0
1
2
3
4
5
6
7
Project A
-$300
-$387
-$193
-$100
$600
$600
$850
-$180
Project B
-$400
$135
$135
$135
$135
$135
$135
$0
What is each project's NPV? Negative values, if any, should be
indicated by a minus sign. Do not round intermediate calculations.
Round your answers to the nearest cent.
Project A:...

A company has an 11% WACC and is considering two mutually
exclusive investments (that cannot be repeated) with the following
cash flows:
0
1
2
3
4
5
6
7
Project A
-$300
-$387
-$193
-$100
$600
$600
$850
-$180
Project B
-$400
$133
$133
$133
$133
$133
$133
$0
What is each project's NPV? Negative values, if any, should be
indicated by a minus sign. Do not round intermediate calculations.
Round your answers to the nearest cent.
Project A:...

A company has a 13% WACC and is considering two mutually
exclusive investments (that cannot be repeated) with the following
cash flows:
0
1
2
3
4
5
6
7
Project A
-$300
-$387
-$193
-$100
$600
$600
$850
-$180
Project B
-$405
$134
$134
$134
$134
$134
$134
$0
The data has been collected in the Microsoft Excel Online file
below. Open the spreadsheet and perform the required analysis to
answer the questions below.
Open spreadsheet
What is each...

The management of Advanced Alternative Power Inc. is considering
two capital investment projects. The estimated net cash flows from
each project are as follows:
Year
Wind
Turbines
Biofuel Equipment
1
$170,000
$320,000
2
170,000
320,000
3
170,000
320,000
4
170,000
320,000
The wind turbines require an investment of $516,290, while the
biofuel equipment requires an investment of $913,600. No residual
value is expected from either project.
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%...

The management of Quest Media Inc. is considering two capital
investment projects. The estimated net cash flows from each project
are as follows:
Year
Radio Station
TV Station
1
$200,000
$360,000
2
200,000
360,000
3
200,000
360,000
4
200,000
360,000
Present Value of an Annuity of $1 at
Compound Interest
Year
6%
10%
12%
15%
20%
1
0.943
0.909
0.893
0.870
0.833
2
1.833
1.736
1.690
1.626
1.528
3
2.673
2.487
2.402
2.283
2.106
4
3.465
3.170
3.037
2.855
2.589...

Alternative Capital Investments
The investment committee of Sentry Insurance Co. is evaluating
two projects, office expansion and upgrade to computer servers. The
projects have different useful lives, but each requires an
investment of $1,476,000. The estimated net cash flows from each
project are as follows:
Net Cash Flow
Year
Office Expansion
Server
1
$371,000
$490,000
2
371,000
490,000
3
371,000
490,000
4
371,000
490,000
5
371,000
6
371,000
The committee has selected a rate of 10% for purposes...

Alternative Capital Investments
The investment committee of Shield Insurance Co. is evaluating
two projects, office expansion and upgrade to computer servers. The
projects have different useful lives, but each requires an
investment of $1,406,000. The estimated net cash flows from each
project are as follows:
Net Cash
Flow
Year
Office Expansion
Server Upgrade
1
$354,000
$467,000
2
354,000
467,000
3
354,000
467,000
4
354,000
467,000
5
354,000
6
354,000
The committee has selected a rate of 10% for...

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