Armando Company is considering a capital investment of $143,750 in additional pr

Question

Armando Company is considering a capital investment of $143,750 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 cash inflows are expected to be $16,180 and $47,420, respectively. Armando has a 12% cost of capital rate, which is the minimum acceptable rate of return on the investment. (Round payback to 2 decimal places, e.g. 10.50.  Round other answers to 0 decimals places, e.g. 125.)

Instructions

  Compute the following:  

Armando Company is considering a capital investment of $143,750 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 cash inflows are expected to be $16,180 and $47,420, respectively. Armando has a 12% cost of capital rate, which is the minimum acceptable rate of return on the investment. (Round payback to 2 decimal places, e.g. 10.50. Round other answers to 0 decimals places, e.g. 125.) Compute the following: Annual rate of return Cash payback period on the proposed capital expenditure Using the discounted cash flow technique, compute the net present value $

Explanation / Answer

Hi,

Please find the answer as follows;

Part A:

Annual Rate of Return = Average Income/Average Investment = 16180/(143750/2) = 23%

Part B:

Payback Period = Initial Investment/Annual Cash Inflows = 143750/47420 = 3.03 Years

Part C:

NPV = - 143750 + 47420/(1+.12)^1 + 47420/(1+.12)^2 + 47420/(1+.12)^3 + 47420/(1+.12)^4 + 47420/(1+.12)^5 = 27188

Thanks.

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