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Vilas Company is considering a capital investment of $190,400 in additional prod

ID: 2447304 • Letter: V

Question

Vilas Company is considering a capital investment of $190,400 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 are expected to be $12,400 and $49,630, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.

Compute the cash payback period.
Cash payback period _________years

Compute the annual rate of return on the proposed capital expenditure.
Annual rate of return __________%

TABLE 1 Future Value of 1 Periods 4% .00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 1.00000 .04000 1.05000 1.06000 1.07000 1.08000 1.09000 1.10000 1.11000 1.12000 .15000 .08160 1.10250 1.12360 1.14490 16640 .18810 1.21000 .23210 1.25440 1.32250 1.12486 15763 1.19102 1.22504 125971 .29503 1.33100 1.36763 1.40493 1.52088 1.16986 1.21551 1.26248 1.31080 1.36049 1.41158 1.46410 1.51807 1.57352 1.74901 1.216651.27628 1.33823 1.40255 1.46933 1.53862 1.6105 1.68506 1.76234 2.01136 1.26532 1.34010 1.41852 1.50073 1.58687 1.67710 1.77156 1.87041 1.97382 2.31306 1.31593 1.40710 1.50363 1.60578 71382 .82804 1.94872 2.07616 2.21068 2.66002 1.368571.47746 1.59385 1.71819 85093 1.99256 2.14359 2.30454 2.47596 3.05902 .42331 155133 1.68948 1.83846 .99900 2.17189 2.35795 2.55803 2.77308 3.51788 1.48024 1.62889 1.79085 1.96715 2.15892 2.36736 2.59374 2.83942 3.10585 4.04556 1.53945 1.71034 1.89830 2.10485 2.33164 2.58043 2.85312 3.15176 3.47855 4.65239 1.60103 1.79586 2.01220 2.25219 2.51817 2.81267 3.13843 3.49845 3.89598 5.35025 1.66507188565 2.13293 2.40985 2.71962 3.06581 3.452273.88328 4.36349 6.15279 73168 1.97993 2.26090 2.57853 2.93719 3.34173 3.79750 4.31044 4.88711 7.07571 1.80094 2.07893 2.39656 2.75903 3.17217 3.64248 4.17725 4.78459 5.47357 8.13706 1.87298 2.18287 2.54035 2.95216 3.42594 3.97031 4.59497 5.31089 6.13039 9.35762 .94790 2.29202 2.69277 3.15882 3.70002 4.32763 5.05447 5.89509 6.86604 10.76126 2.02582 2.40662 2.85434 3.37993 3.99602 4.71712 5.55992 6.54355 7.68997 12.37545 2.10685 2.52695 3.02560 3.61653 4.31570 5.14166 6.9 7.26334 8.61276 14.23177 2.19112 2.65330 3.20714 3.86968 4.66096 5.60441 6.72750 8.06231 9.64629 6.36654 0 2 2 2

Explanation / Answer

Compute the cash payback period.
Cash payback period = Initial Investment/ net annual cash flows

Cash payback period = 190400/49630

Cash payback period = 3.84 Years

Compute the annual rate of return on the proposed capital expenditure.
Annual rate of return = Annual net Income/Average Investment

Annual rate of return = 12400/((190400+0)/2)

Annual rate of return = 13.03%

Using the discounted cash flow technique, compute the net present value.
Net Present Value =- Initial Investment + net annual cash flows*PVIFA(12%,5)

Net Present Value = -190400 +49630*3.60478

Net Present Value = - $ 11,494.77