Campbell Electronics is considering investing in manufacturing equipment expecte

Question

Campbell Electronics is considering investing in manufacturing equipment expected to cost $240,000. The equipment has an estimated useful life of four years and a salvage value of $ 18,000. It is expected to produce incremental cash revenues of $120,000 per year. Campbell has an effective income tax rate of 35 percent and a desired rate of return of 14 percent. (PV of $1 and PVA of $1) (Use appropriate factor(s) from the tables provided.)

   

Required

Determine the net present value and the present value index of the investment, assuming that Campbell uses straight-line depreciation for financial and income tax reporting.

Determine the net present value and the present value index of the investment, assuming that Campbell uses double-declining-balance depreciation for financial and income tax reporting.

Determine the payback period and unadjusted rate of return (use average investment), assuming that Campbell uses straight-line depreciation.

Determine the payback period and unadjusted rate of return (use average investment), assuming that Campbell uses double-declining-balance depreciation. (Note: Use average annual cash flow when computing the payback period and average annual income when determining the unadjusted rate of return.)

** use all decimal factors

Explanation / Answer

Solution 1:

Solution 2:

Solution 3:

Payback period = Initital investment / annual cash inflows = $240,000 / $97,425 = 2.46 years

Unadjusted rate of return = Average annual income / Average investment

Average annual income = $41,925

Average investment = ($240,000 +$18,000)/2 = $129,000

Unadjusted rate of return = $41,925 / $129,000 = 32.5%

Solution 4:

Payback period = 2 years + ($240,000 - $219,000) / $88,500 = 2.24 years

Unajdusted rate of return = Average annual income / Average investment

Average annual income = ($0 + $39,500 + $58,500 + $70,200)/4 = $41,925

Average investment = ($240,000 +$18,000)/2 = $129,000

Unadjusted rate of return = $41,925 / $129,000 = 32.5%

Computation of Annual cash flows - SLM Particulars Amount Incremental cash revenues $120,000.00 Annual depreciation $55,500.00 Incremental income $64,500.00 Tax (35%) $22,575.00 Income after tax $41,925.00 Add: Depreciation $55,500.00 Annual after tax cash flows $97,425.00

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