Hearne Company has a number of potential capital investments. Because these proj

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. Project 1: Retooling Manufacturing Facility This project would require an initial investment of $5,150,000. It would generate $919,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,072,000. Project 2: Purchase Patent for New Product The patent would cost $3,610,000, which would be fully amortized over five years. Production of this product would generate $559,550 additional annual net income for Hearne. Project 3: Purchase a New Fleet of Delivery Trucks Hearne could purchase 25 new delivery trucks at a cost of $145,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,600. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $561,900 of additional net income per year. Required 1. Determine each project's accounting rate of return. (Round your answers to 2 decimal places.) Accounting Rate of Return Project Project 2 7.95 % 15.50 % 15.501 % Project 31 15.501%

Explanation / Answer

year project 1 project 2 project 3 DF   @ 10% PV 1 PV 2 PV 3 0 -5150000 -3610000 -3625000 1 -5150000 -3610000 -3625000 1 919000 559550 561900 0.909091 835454.55 508681.8182 510818.182 2 919000 559550 561900 0.826446 759504.13 462438.0165 464380.165 3 919000 559550 561900 0.751315 690458.3 420398.1968 422163.787 4 919000 559550 561900 0.683013 627689.37 382180.1789 383785.261 5 919000 559550 561900 0.620921 570626.7 347436.5263 348895.691 6 919000 561900 0.564474 518751.54 0 317177.901 7 919000 561900 0.513158 471592.31 0 288343.547 8 1991000 561900 0.466507 928816.19 0 262130.497 9 561900 0.424098 0 0 238300.452 10 701900 0.385543 0 0 270612.835 3 NPV 252893.09 -1488865.26 -118391.68 4 PI 1.05 0.59 0.97

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