Vilas Company is considering a capital investment of $190,400 in additional prod
ID: 2447304 • Letter: V
Question
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 $12,400 and $49,630, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.
Compute the cash payback period.
Cash payback period _________years
Compute the annual rate of return on the proposed capital expenditure.
Annual rate of return __________%
Explanation / Answer
Compute the cash payback period.
Cash payback period = Initial Investment/ net annual cash flows
Cash payback period = 190400/49630
Cash payback period = 3.84 Years
Compute the annual rate of return on the proposed capital expenditure.
Annual rate of return = Annual net Income/Average Investment
Annual rate of return = 12400/((190400+0)/2)
Annual rate of return = 13.03%
Using the discounted cash flow technique, compute the net present value.
Net Present Value =- Initial Investment + net annual cash flows*PVIFA(12%,5)
Net Present Value = -190400 +49630*3.60478
Net Present Value = - $ 11,494.77
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