Vilas Company is considering a capital investment of $191,800 in additional prod

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 are expected to be $12,060 and $49,800, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment

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 preceding the number e.g. -45 or parentheses e.g. (45). Round answer for present value to 0 decimal places, e.g. 125.)

Explanation / Answer

1. Cash payback period is Initial investment / annual cash flows = 191,800/ 49,800 = 3.85 years Ans.

2. Annual rate of return = Annual net income/ average investment x 100 = 12,060/38,360 x100= 31.44% Ans.

3. At 12% cost of capital, present value interest factor of an annuity of $ 1 is 3.605. So, if the annual cash flows are $ 49,800, their present value would be 49,800 x 3.605 = $ 179, 529. Hence Net Present Value of the project is 191,800- 179,529= $ 12,271 Ans

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