Vilas Company is considering a capital investment of $191,800 in additional prod
ID: 2424739 • Letter: V
Question
Vilas Company is considering a capital investment of $191,800 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 art expected to be $12,270 and $49,490, 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. (For calculation purposes, use 5 decimal places as displayed in the factor table provide.) Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.) Compute the annual rate of return on the proposed capital expenditure. (Round answer to 1 decimal place, e.g. 20.5.) Using the discounted cash flow technique, compute the net present value. (If the net present value is negative, use either a negative sign proceding the number e.g. -45 or parentheses e.g. (45). Round answer for present value to 0 decimal places, e.g. 125.)Explanation / Answer
Answer:
It is given that;
Initial Investment = $ 191,800
Total Annual Cash Inflow = Net Income + Annual Cash Flows = $ 12,270 + $ 49,490 = $ 61,760
Note: In absence of clarity we have assumed that annual cash flows are cash inflows.
Required rate of return = 12%
Project Life = 5 years;
Since, there is no taxation details given therefore, we will neglect depreciation in our calculations.
Now,
1. Pay Back Period = Initial Investment / Annual Cash Inflows = $ 191,800 / $ 61,760 = 3.10 = 3 years 1 months and 6 days approx.
2. Annual Rate of return on capital expenditure = $ 61,760 x 100 / $ 191,800 = 32.15%
3. Net Present Value = Present Value of Cash Inflows - Present Value of Cash Outflows
NPV = Annual Cash Inflow x Discount Factor of Annuity@12% for 5 years - $ 191,800
NPV = $ 61,760 x 3.605 - $ 191,800 = $ 222,644.80 - $ 191,800 = $ 30,844.80
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