Pack & Carry is debating whether to invest in new equipment to manufacture a lin
ID: 2436724 • Letter: P
Question
Pack & Carry is debating whether to invest in new equipment to manufacture a line of high-quality luggage. The new equipment would cost $900,000, with an estimated four-year life and no salvage value. The estimated annual operating results with the new equipment are as follows. (Use Exhibit 26-4.)
All revenue from the new luggage line and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.
a. Compute the annual cash flows for the investment in the new equipment to produce the new luggage line.
b. Compute the payback period for the investment in the new equipment to produce the new luggage line. (Round your answer to 1 decimal place.)
c. Compute the return on average investment for the investment in the new equipment to produce the new luggage line. (Round your percentage answer to 1 decimal place (i.e., 12.34 to be entered as 12.3).)
d. Compute the total present value of the expected future annual cash inflows, discounted at an annual rate of 10 percent for the investment in the new equipment to produce the new luggage line. (Round your "PV factor" to 3 decimal places and final answer to the nearest dollar amount.)
e. Compute the net present value of the proposed investment discounted at 10 percent for the investment in the new equipment to produce the new luggage line. (Round your "PV factor" to 3 decimal places and final answer to the nearest dollar amount.)
a) ANNUAL CASHFLOWS = _____
b) PAYBACK PERIOD (ROUND TO1 DECIMAL PLACE) = ____ YEARS
c) RETURN ON AVERAGE INVESTMENT =____ %
D) TOTAL PRESENT VALUE =____
E) NET PRESENT VALUE =_____
Revenue from sales of new luggage $ 962,000 Expenses other than depreciation $ 675,000 Depreciation (straight-line basis) 225,000 900,000 Increase in net income from the new line $ 62,000
Explanation / Answer
Answer
Revenue
962,000
Expenses other than depreciation
675,000
Depreciation
225,000
Net Income
62,000
1.
Revenue
962,000
Expenses other than depreciation
675,000
Cash Income/ Cash Inflow
287,000
Annual Cash Inflow = $287,000
Depreciation will not be considered as it is a Non-Cash Expense.
2.
Year
Cash Inflow
Cumm. Cash Inflow
1
287,000
287,000
2
287,000
574,000
3
287,000
861,000
4
287,000
1,148,000
We have to invest $900,000 initially so in 3 Years we will get $861,000 and in 4th year we will get the remaining amount.
Payback period = 3 Years + [(900,000 – 861,000) / 287,000]
= 3 + 0.136
Payback period = 3.136 Years
3.
Return on Average Investment = Net Income / Average Investment
= $62,000 / [(900,000 + 0) / 2]
Return on Average Investment = 13.78%
4.
Present Value Annuity Factor (PVAF) @ 10% for 4 years = 3.169865
Total Present Value = Annual Cash Inflow * PVAF @10% for 4 Years
= $287,000 * 3.169865
Total Present Value = $909,751.26
5.
NPV = Total Present Value – Initial Investment
= $909,751.26 - $900,000
NPV = $9,751.26
Dear Student, if u have any doubt, plz feel free to reach me.
Revenue
962,000
Expenses other than depreciation
675,000
Depreciation
225,000
Net Income
62,000
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