Hearne Company has a number of potential capital investments. Because these proj
ID: 2454875 • Letter: H
Question
Hearne Company has a number of potential capital investments. Because these projects vary in nature, initial investment, and time horizon, management is finding it difficult to compare them. Assume straight line depreciation method is used.
This project would require an initial investment of $5,650,000. It would generate $1,009,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,192,000.
The patent would cost $3,960,000, which would be fully amortized over five years. Production of this product would generate $811,800 additional annual net income for Hearne.
Hearne could purchase 25 new delivery trucks at a cost of $195,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $6,600. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $999,380 of additional net income per year.
Determine each project's payback period. (Round your answers to 2 decimal places.)
Using a discount rate of 10 percent, calculate the net present value of each project. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Round your intermediate calculations to 4 decimal places and final answers to 2 decimal places.)
Determine each project's accounting rate of return. (Round your answers to 2 decimal places.)
Determine the profitability index of each project and prioritize the projects for Hearne. (Round your intermediate calculations to 2 decimal places. Round your final answers to 4 decimal places.)
The numbers are out of order... Sorry, it won't let me copy and paste in the correct order!!
Hearne Company has a number of potential capital investments. Because these projects vary in nature, initial investment, and time horizon, management is finding it difficult to compare them. Assume straight line depreciation method is used.
Explanation / Answer
Answer = Pay back period
For Project - 1
Payback period = Initial Investment/Annual cash flow
= 5650000/1009000 = 5.599= 5 years 7 months apprx
For Project - 2
= 3960000/811800 = 4.88 = 4 years 10 months approx
For Project -3 = 195000*25/999380 = 4.88 = 4 years 10 months approx
Answer - 2
Net Present Value
For Project -1
PV of cash In flow at 10 % for 8 years = 1009000*5.335 = 5383015
PV of Salvage = 1192000*0.467 = 556664
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Total 5939679
Less intitial out lay 5650000
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NPV 289679
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For Project - 2 PV of cash In flow at 10 % for 5 years = 811800*3.791 = 3077533.80
less initial out lay 3960000.00
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NPV -882466.20
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For Project - 3 PV of cash In flow at 10 % for 10 years 999380*6.145 = 6141190.10
Pv of salvage 25*6600*0.386 = 63690.00
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Total 6204880.10
Less initial out lay 195000*25 4875000.00
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NPV 1329880.10
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Answer -3 Accounting Rate of Return
Accounting Rate of return = average annual profit/ intial investment
For Project - 1
ARR = 1009000/5650000 = 17.86 %
For Project - 2
ARR = 811800/3960000 = 20.50%
For Project - 3
ARR = 999380/195000*25 = 20.50%
Answer -4 Profitability Index
Profitability Index = Present value of cash inflow/Present value of cash out flow
For Project - 1
= 5939679/5650000 = 1.05
For Project - 2
= 3077533.80/3960000 = 0.78
For Project - 3
= 6204880.10/4875000 = 1.27
Priortiz of project on Profitability index basis.
Project - 1 = IInd
Project - 2 = IIIrd
Project - 3 = Ist.
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