Pack & Carry is debating whether to invest in new equipment to manufacture a lin

Question

Pack & Carry is debating whether to invest in new equipment to manufacture a line of high-quality luggage. The new equipment would cost $900,000, with an estimated four-year life and no salvage value. The estimated annual operating results with the new equipment are as follows.(Use Exhiblt 26-4.) Revenue from sales of new luggage Expenses other than depreciation $675,000 Depreciation (straight-line banis) Increase in net income from the new line 968,000 225,000 900,000 $ 68,000 All revenue from the new luggage line and all expenses (except depreclation) will be received or paid in cash in the same perlod as recognized for accounting purposes. a. Compute the annual cash flows for the investment in the new equipment to produce the new luggage line. b. Compute the payback period for the investment in the new equipment to produce the new luggage line. (Round your answer to 1 decimal place.) c. Compute the return on average investment for the Investment in the new equipment to produce the new luggage line. (Round your percentage answer to 1 decimal place (i.e., 12.34 to be entered as 12.3).) d. Compute the total present value of the expected future annual cash inflows, discounted at an annual rate of 10 percent for the investment in the new equipment to produce the new luggage line. (Round your "PV factor" to 3 declmal places and final answer to the nearest dollar amount.) e. Compute the net present value of the proposed investment discounted at 10 percent for the investment in the new equipment to produce the new luggage line. (Round your "PV factor" to 3 declmal places and final answer to the nearest dollar amount. a. Annual cash flows b. Payback period c. Return on average investmert d. Total present value o. Net present value years

Explanation / Answer

Solution a:

Annual cash flows for the investment in new equipment to produce new luggage line = Net Income from new line + Depreciation = $68,000 + $225,000 = $293,000

Solution b:

Payback period for the investment in new equipment = Initital investment/ Annual cash inflows

= $900,000 / $293,000 = 3.1 years

Solution c:

Average annual income = $68,000

Average investment = (Initial investment + Salvage value) / 2 = $900,000/2 = $450,000

Return on average investment = $68,000 / $450,000 = 15.1%

Solution d:

Present value of expected future annual cash inflows in new equipment = Annual cash inflows * Cumulative PV factor at 10% for 4 years

= $293,000 * 3.169 = $928,517

Solution e:

Net Present value = Present value of cash inflows - Initial investment = $928,517 - $900,000 = $28,517

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