Hearne Company has a number of potential capital investments. Because these proj
ID: 2467218 • 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 $5,200,000. It would generate $928,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,084,000.
The patent would cost $3,645,000, which would be fully amortized over five years. Production of this product would generate $583,200 additional annual net income for Hearne.
Hearne could purchase 25 new delivery trucks at a cost of $150,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,700. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $600,000 of additional net income per year.
FILL IN THE BLANK !! FOR PROJECT 3
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.
Required: 1. Determine each project's accounting rate of return. (Round your answers to 2 decimal places.) Accounting Rate of Return Project 1 Project 2 Project 3 7 95 % 16.00 % 2. Determine each project's payback period. (Round your answers to 2 decimal places.) Payback Project 1 Project 2 Project 3 Period 5.60 Years 2.78 Years Years . using a discount rate 3. Using a discount rate of 10 percent, calculate the net present value of each teoro rom 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.) Net Present Value Project 1 S 256,505.50 Project 2 $1,329,270.00 Project 3 4. 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.) Profitability Index Rank Project 1 Project 2 Project 3 1.0493 1.3647 2Explanation / Answer
1. Computation of Accounting rate of return
Year net income Depreciation Profit
1 600000 360750 239250
2 600000 360750 239250
3 600000 360750 239250
4 600000 360750 239250
5 600000 360750 239250
6 600000 360750 239250
7 600000 360750 239250
8 600000 360750 239250
9 600000 360750 239250
10 600000 360750 239250
2392500
Depreciation = 25*150000 - 25*5700 / 10 = 360750
ARR = average profit / average investment
average profit = 2392500 / 10 = 239250
Average investment = initial investment - scrapvale / 2 + scrapvalue
= 25*150000 - 25*5700 / 2 +25*5700
= 3750000 -142500 / 2 +142500
= 1946250.
ARR = 239250 / 1946250 = 12.29%
Computation of payback period
Year net income depreciation cash flows Cummulative cash flows
1 600000 360750 960750 960750
2 600000 360750 960750 1921500
3 600000 360750 960750 2882250
4 600000 360750 960750 3843000
5 600000 360750 960750 4803750
6 600000 360750 960750 5764500
7 600000 360750 960750 6725250
8 600000 360750 960750 7686000
9 600000 360750 960750 8646750
10 600000 360750 960750 9607500
Payback period = 3 + 867750 / 960750
= 3 + 0.9 = 3.9 years
Computation of Net present value
Year cash flows discount@10% PVCF
1 960750 0.909 873321.75
2 960750 0.826 793579.5
3 960750 0.751 721523.25
4 960750 0.683 656192.25
5 960750 0.621 596625.75
6 960750 0.564 541863
7 960750 0.513 492864.75
8 960750 0.467 448670.25
9 960750 0.424 407358
10 960750 0.386 370849.5
5902848
less: initial investment (3750000)
NPV 2152848
Profitability index = PV cash flows / PV outflows
= 5902848 / 2152848 = 2.74
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