Morgan Company is considering a capital investment of $180,000 in additional pro

Question

Morgan Company is considering a capital investment of $180,000 in additional productive facilities. The new machinery is expected to have a useful life of 6 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 $20,000 and $50,000 respectively. Morgan has a 15% cost of capital rate which is the required rate of return on the investment.




Compute (1) the cash payback period and (2) the annual rate of return on the proposed capital expenditure. (Round answers to 1 decimal place, e.g. 10.5.)
Cash payback period years
Annual rate of return %







Using the discounted cash flow technique, compute the net present value. (Round computations for 15% Discount Factor to 5 decimal places. Round answer to 0 decimal places e.g. 125.)
$

Explanation / Answer

1. Annual Cahs flow is $50,000 So Cash Payback period = Initial Investment/ANnual Cash Flow = $180000/$50000 = 3.6 Yrs 2. Annual Rate of return is given by excel function IRR(CFs) SO ARR = IRR(-180000,50000,50000,50000,50000,50000,50000) = 16.9% 3. Kd = 15% & CF1=CF2=......=CF6 = $50000 Disc Rate @15% for 6Yrs = 3.78448 NPV = CF0+CF1/(1+Kd)^1+CF2/(1+Kd)^2+CF3/(1+Kd)^3+CF4/(1+Kd)^4+CF5/(1+Kd)^5+CF6/(1+Kd)^6 is NPV= -180000+50000*3.78448 =$9,224...........Ans (3)

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