Vilas Company is considering a capital investment of $190,600 in additional prod

Question

Vilas Company is considering a capital investment of $190,600 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 $17,470 and $49,780, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment. Compute Cash Payback Period in years. Compute Annual Rate of Return. Compute Net PResent Value.

Explanation / Answer

Part A)

Payback period is the period within which the initial investment is recovered by the company. The cash payback period is calculated with the use of following formula:

Cash Payback Period = Initial Investment/Annual Cash Flows

________

Using the values provided in the question, we get,

Cash Payback Period = 190,600/49,780 = 3.83 Years

________

Part B)

The annual rate of return can be calculated with the use of following formula:

Annual Rate of Return = Net Income/Average Investment*100

________

Using the values provided in the question, we get,

Annual Rate of Return = 17,470/[(190,600 + 0)/2]*100 = 18.33%

the Annual Rate of Return can also be calculated as follows:

Annual Rate of Return = 17,470/190,600*100 = 9.17%

________

Part C)

Net present value is the difference between the present value of cash inflows and cash outflows. The formula for calculating NPV is given below:

NPV = Cash Flow Year 0 + Cash Flow Year 1/(1+Cost of Capital)^1 + Cash Flow Year 2/(1+Cost of Capital)^2 + Cash Flow Year 3/(1+Cost of Capital)^3 + Cash Flow Year 4/(1+Cost of Capital)^4 + Cash Flow Year 5/(1+Cost of Capital)^5

________

Using the values provided in the question, we get,

NPV = -190,600 + 49,780/(1+12%)^1 + 49,780/(1+12%)^2 + 49,780/(1+12%)^3 + 49,780/(1+12%)^4 + 49,780/(1+12%)^5 = -$11,154.24

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