Exercise 24-10 Vilas Company is considering a capital investment of $190,300 in

Question

Exercise 24-10 Vilas Company is considering a capital investment of $190,300 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 $12,540 and $49,190, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment. Click here to view the factor table (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.) Cash payback period years Compute the annual rate of return on the proposed capital expenditure. (Round answer to 1 decimal place, e.g. 20.5.) Annual rate of return

Explanation / Answer

Cash payback period = Capital investment / annual cash flow
= $190,300 / $49,190
=  3.9 years

Annual Rate of return = annual income / Average investment
= [$12,540 / {($190,300+0)/2}]
= 13.2%

Net Present Value:
Net annual cash flows $49,190 x 3.60478 = $177,319
Less: Capital investment = $190,300
Negative net present value = ($12,981)

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