Hearne Company has a number of potential capital investments. Because these proj

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Hearne Company has a number of potential capital investments. Because these projects vary in nature, initial investment, and time horizon, management is finding it difficult to compare them. Assume straight line depreciation method is used. Project 1: Retooling Manufacturing Facility This project would require an initial investment of $5,100,000. It would generate $910,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,060,000. Project 2: Purchase Patent for New Product The patent would cost $3,575,000, which would be fully amortized over five years. Production of this product would generate $536,250 additional annual net income for Hearne. Project 3: Purchase a New Fleet of Delivery Trucks Hearne could purchase 25 new delivery trucks at a cost of $140,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,500. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $525,000 of additional net income per year. Required: 1. Determine each project's accounting rate of return. (Round your answers to 2 decimal places.) 2. Determine each project's payback period. (Round your answers to 2 decimal places.) 3. Using a discount rate of 10 percent, calculate the net present value of each project. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Round your intermediate calculations to 4 decimal places and final answers to 2 decimal places.) 4. Determine the profitability index of each project and prioritize the projects for Hearne. (Round your intermediate calculations to 2 decimal places. Round your final answers to 4 decimal places.)

Explanation / Answer

3. Net Present Value

4. Profitability Index and Priority

Project 1 Project 2 Project 3 A Initial Investment 5100000 3575000 3500000 B Salvage Value 1060000 0 137500 C Useful Life 8 5 10 D=(A-B)/C Depreciation per year 505000 715000 336250 E (Project 1=F-D) Net Income 405000 536250 525000 F=D+E (except project 1 where this is given in que Net Cash Flow 910000 1251250 861250 E/A*100 (Net Income/Initial Investment) 1. Accounting Rate of Return 7.9412 15 15 A/F (Initial Investment/Net Cash FLow) 2. Payback Period 5.6044 2.8571 4.0639

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