Exercise 12-10 Vilas Company is considering a capital investment of $190,800 in

Question

Exercise 12-10

Vilas Company is considering a capital investment of $190,800 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 $17,100 and $49,400, 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

cash payback period = Initial Investment / Annual Cash inflow

$190,800 / $49,400 = 3.86 years

annual rate of return = Net income / Initial Investment

$17,100 / $190,800 = 8.96 %

net present value = PV of all cash inflows - PV of all cash outflows

$49,400 * PVIFA ( 12 % , 5 years ) - $190,800 =

(49400 * 3.6048 ) - 190800 =

178077 - 190800 =

- $ 12723

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