Net Present Value Analysis Anderson Company must evaluate two capital expenditur

Question

Net Present Value Analysis Anderson Company must evaluate two capital expenditure proposals. Anderson's hurdle rate is 12%. Data for the two proposals follow. Proposal X Proposal Y $360,000 $360,000 Required investment Annual after-tax cash inflows After-tax cash inflows at the end of years 3, 6, 9, and 12 Life of project 188,000 2 years 12 years What is the cash payback period for Proposal X? For Proposal Y? Hint: For Proposal Y, in what year (3, 6,9 or 12) will the full original investment be recovered? Round Proposal X answer to one decimal place, if applicable. Proposal X years Proposal Y years

Explanation / Answer

Cash payback period = Initial investment/Annual cash flow

Proposal X = 360000/80400 = 4.5 years

Proposal Y = 6 Yearss

Calculate average rate of return on investment :

Average investment = 140000/2 = 70000

Average rate of return on investment = 7150*100/70000 = 10%

Increase in revenue 35000 Increase in expense (10000+14000) 24000 Pretax income from investment 11000 Income tax expense 3850 Net income from investment 7150

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