Vilas Company is considering a capital investment of $190,900 in additional prod

Question

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 $10,200 and $49,000, 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. Compute the cash payback period. (Round answer to 2 decimal places, e.g. 10.50.) Cash payback period ars Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.50.) Annual rate of return 5.34 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.) Net present value (14266)

Explanation / Answer

Average Annual Rate of Return for the Proposed Capital Expenditure = Average Annual Income/Average Investment

Average Annual Income = 10200

Average Investment = (Book Value At Year 1 + Book Value at end of Useful Life)/2

Hence Average Investment = (190900+0)/2 = 95,450 (Book Value at end of 5 year is 0)

ARR = 10200/95450 = 10.69%

3. Calculation of NPV

NPV = PV of Inflow - PV of Outflow

PV of Inflow = 49000 * PV of annuity 1$ @12% for 5 Year = 49,000 * 3.6= 176,634.

NPV = 176,634 – 190900 = -14266

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