Exercise 12-10 Vilas Company is considering a capital investment of $191,600 in

Question

Exercise 12-10 Vilas Company is considering a capital investment of $191,600 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 $13,300 and $50,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment. Compute the cash payback period. (Round answer to 2 decimal places, e.g. 10.50.) Cash payback period years 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 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 O decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present value

Explanation / Answer

Answer a Cash payback period = Capital Investment / Annual Cash flows Cash payback period = $191600 / $50000 = 3.83 years Annual rate of return = Annual net Income / Capital Investment Annual rate of return = $13300 / $191600 = 6.94% Answer b Calculation of Net present value Year Cash Flow Discount Factor @ 12% Present Values 0 -$191,600.00    1.00000 -$191,600.00 1 $50,000.00    0.89286 $44,642.86 2 $50,000.00    0.79719 $39,859.69 3 $50,000.00    0.71178 $35,589.01 4 $50,000.00    0.63552 $31,775.90 5 $50,000.00    0.56743 $28,371.34 NPV -$11,361.19 Net Present Value -$11,361.19

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