Exercise 24-10 Vilas Company is considering a capital investment of $190,900 in
ID: 2508853 • Letter: E
Question
Exercise 24-10
Vilas Company is considering a capital investment of $190,900 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 $11,700 and $50,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.
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(a)
Compute the cash payback period. (Round answer to 2 decimal places, e.g. 10.50.)
Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.50.)
(b)
Using the discounted cash flow technique, compute the net present value. (If the net present value is negative, use either a negative sign preceding the number e.g. -45 or parentheses e.g. (45). Round answer for present value to 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)
Explanation / Answer
Answer
A.Cash payback period:
= Capital investment / Net annual cash flows
= $190,900 / $50,000
= 3.8 years
B.Annual rate of return :
Annual rate of return = Annual net income / Average investment
Annual rate of return = $11,700 / $95,450 = 12.26%
W.n. Average investment = (Cost of new machinery + salvage value) / 2= ($190,900 + 0) / 2= $95,450
C. The net present value:
= Present value of net annual cash flows - Capital investment
= [$50,000 x PVIFA (12%, 5)] - $190,900
=($50,000 x *3.60478) - $190,900
=$180239-$190900
=-$10661
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