Vilas Company is considering a capital investment of $191,600 in additional prod

Question

Vilas Company is considering a capital investment of $191,600 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 $11,270 and $49,180, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment. Compute the cash payback period. Compute the annual rate of return on the proposed capital expenditure.

Explanation / Answer

Cash pay back period = 191600/49180 = $ 3.9 years

Annual Rate of Return = Net annual income/Average Investment = 11270/(191600/2)=11270/95800 =0.11764         = 11.76%

Note: the annual rate of return can also be calculated on the initial investment, in which case

         the rate of return will be 11270/191600 =0.05882= 5.88%

Related Questions

Navigate

• Browse (All)
• Browse V
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.