Exercise 24-10 Vilas Company is considering a capital investment of $190,400 in
ID: 2588552 • Letter: E
Question
Exercise 24-10 Vilas Company is considering a capital investment of $190,400 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 $17,900 and $49,200, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment. lic Compute the cash payback period. (Round answer to 2 decimal places, e.g. 10.5o.) Cash payback period ears 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 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Net present valueExplanation / Answer
(a) Cash payback period= $190,400/$49,200 = 3.87 year
Annual rate of return = Net Annual Income / Average investment
= $17,900 / {($190,400+0)/2}
= $17,900 / $95200
= 18.80%
(b) Net present value
Net annual cash flows $49,200 x 3.60478 = $177,355
Less: Capital investment = $190,400
Net present value = ($13,045)
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