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 $11,700 and $50,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.


(a)

Compute the cash payback period. (Round answer to 2 decimal places, e.g. 10.50.)

Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.50.)

(b)

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.)

Explanation / Answer

Compute the cash payback period.

Cash payback period = Initial investment/annual cash flow

= 190900/50000

Cash payback period = 3.82 years

Compute the annual rate of return on the proposed capital expenditure.

Annual rate of return = net income*100/initial investment

= 11700*100/190900

Annual rate of return = 6.13%

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 = Present value of cash inflow-present value of cash outflow

= (50000*3.60478-190900)

Net present value = (10661)

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