Mouser Company is evaluating a capital expenditure proposal with the following p

Question

Mouser Company is evaluating a capital expenditure proposal with the following predicted cash flows: Initial investment: $110,000 Operations: Year 1 $40,000 Year 2 30,000 Year 3 55,000 Salvage value: -0- Additional information for interest rate of 12 percent: Present value of $1 - year 1 0.893 Present value of $1 - year 2 0.797 Present value of $1 - year 3 0.712 Present value of an annuity of $1, (3 periods) 2.402 Required: Determine the following values: a. Net present value of the investment at a discount rate of 12 percent b. Payback period c. Accounting rate of return using average investmentestment at a discount rate of 12 percent

Explanation / Answer

Present value of cash flow = (PVF@12%,1*CF1 )+(PVF@12%,2*CF2)+(PVF@12%,3*CF3)

                          = (.893 *40000 )+(.797* 30000)+(.712 *55000)

                        = 35720+ 23910+ 39160

                      = 98790

NPV =present value -Initial investment

        = 98790 - 110000

       = - 11210

b) cummulative cash flow up to year 2 = -110000 + 40000 +30000 = -40000

Payback period =year up to which cummulative cash flow is negative +(Cummulative cash flow of that year /cash flow of next year)

             =   2 + (40000/ 55000)

               = 2 + .73

              = 2.73%

c) Average return =(present value of cash flow /3 ) /Investment

                       = (98790 /3) /110000

                      = 32930/ 110000

                       = .2994 or 29.94%

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