Vilas Company is considering a capital investment of $191,300 in additional prod
ID: 2526158 • Letter: V
Question
Vilas Company is considering a capital investment of $191,300 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 $13,600 and $49,400, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.
Click here to view PV table.
(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.
Payback Period = Initial Investment / Annual Net Cash Flows
Payback Period = $191,300 / $49,400
Payback Period = 3.87 years
Answer b.
Average Investment = (Initial Investment + Salvage Value) / 2
Average Investment = ($191,300 + $0) / 2
Average Investment = $95,650
Annual Rate of Return = Annual Net Income / Average Investment
Annual Rate of Return = $13,600 / $95,650
Annual Rate of Return = 0.1422
Annual Rate of Return = 14.22%
Answer c.
NPV = -$191,300 + $49,400 * PVA of $1 (12%, 5)
NPV = -$191,300 + $49,400 * 3.6048
NPV = -$13,223
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.