a number of potential capital investments. Becaus these projects vary in nature

Question

a number of potential capital investments. Becaus these projects vary in nature Hearne Company has 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 $4,850,000. It would generate $865,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,000,000 Project 2: Purchase Patent for New Product The patent would cost $3,400,000, which would be fully amortized over five years. Production of this product would generate $425,000 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 $115,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,000. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $200,000 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 1 Project 2 Project 3

Explanation / Answer

Project 1 Project 2 Project 3 Net Cash flow 865000 1105000 475000 Less Depreciation 481250 680000 275000 Net Income 383750 425000 200000 Investment 4850000 3400000 2875000 Accounting Rate of return =Net Income/investment 7.91% 12.50% 6.96% Payback investment /Net Cash flow 5.61 3.08 6.05 NPV Project 1 Project 2 Project 3 PV Factor 5.3349 3.7908 6.144567 Invstment -4850000 -3400000 -2875000 Present Value of inflow 4614688.5 4188834 2918669 Presnt Value of salvage 466507.38 0 48192.91 Cash inflow 5081195.88 4188834 2966862 NPV 231195.88 788834 91862.29 PI   Cash inflow/Investment 1.0477 1.2320 1.0320 Rank 2 1 3

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