Question 1 Vilas Company is considering a capital investment of $190,400 in addi

Question

Question 1

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 $12,800 and $49,500, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.

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(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

(a) Cash payback period = Capital Investment / Net annual cashflows = 190,400 / 49,500 = 3.84 years

(b) Annual rate of return = (Average Net Income / Average Investment) * 100 = (12,800 / 95,200) * 100 = 13.44%

Average Investment = Initial Investment + Salvage value / 2 = 190,400 + 0 / 2 = $95,200

(c) PV of annual cash inflows = 49,500 * PVAF (12% for 5 years) = 49,500 * 3.60478 = 178,436.61

Less: Cash outflow = (190,400)

NPV = $(11,963.39)

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