Rondello Company is considering a capital investment of $150,000 in additional p
ID: 2389732 • Letter: R
Question
Rondello Company is considering a capital investment of $150,000 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 $18,000 and $48,000, respectively. Rondello has a 12% cost of capital rate, which is the minimum acceptable rate of return on the investment. (Round answers to 0 decimals places, e.g. 2,510 except round payback to 2 decimal places, e.g. 5.25.)Compute the following:
Annual rate of return _____%
Cash payback period on the proposed capital expenditure ____years
Using the discounted cash flow technique, compute the net present value ____$
Explanation / Answer
I have already answered the question as required by the requirement. I supposed you need more clarifications why I use these numbers in calculations:
The main reason why annual profit and annual cash inflows differ is because of the depreciation charge per year of $30000 (150000/5).
Annual rate of return:
We can get annual rate of return by dividing average annual profit by average investment.
Since the salvage value is zero, the average investment is (Initial + Salvage value)/2 = 150000/2 = $75,000
The average annual profit (income) is 18000.
Thus, annual rate of return = 18000/75000 x 100 = 24%
Cash payback period
We can deduce the cash payback period by dividing Initial investment by annual cash inflows.
Thus, cash payback period = 150000/48000 = 3.125 years
Net present value
Annuity factor Present value
Year 0 (150000) 1 (150000)
Year 1 - Year 5 48000 3.605 173040
NPV: $23040
Hope ths helps!
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