Vilas Company is considering a capital investment of $191,500 in additional prod

Question

Vilas Company is considering a capital investment of $191,500 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 $11,450 and $49,200, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.

Vilas Company is considering a capital investment of $191,500 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 $11,450 and $49,200, resp 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 $11,450 and $49,200, respectively Vilas has a 12% cost of capital rate, which is the required rate of return on the investment

Explanation / Answer

Cash payback period=3 years+43,900/49,200=3+0.89=3.89 years

NPV @10% =-$4,993.29

NPV@8% =$4,941.33

difference in NPV=$4,941.33+$4,993.29=$9,934.62

Difference in rate=8%-10%=-2%

Anual rate of return=8%-$4,941.33*(-2%)/$9,934.62=8%+0.99%=8.99%

Pay back period Year Cash flow $ Cumalative cash flow $ 0 -191,500              -191,500 1        49,200              -142,300 2        49,200 -93,100 3        49,200                  -43,900 4        49,200                      5,300

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