So I figured out the first half of this question, but I cannot for the life of m

Question

So I figured out the first half of this question, but I cannot for the life of me figure out the second half. I've tried so many different things that I have almost given up all hope. Here is the question:

Hearne Company has a number of potential capital investments. Because these projects vary in nature, initial investment, and time horizon, management is finding it difficult to compare them. Assume straight line depreciation method is used.

Project 1: Retooling Manufacturing Facility This project would require an initial investment of $5,450,000. It would generate $973,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,144,000.

Project 2: Purchase Patent for New Product The patent would cost $3,820,000, which would be fully amortized over five years. Production of this product would generate $706,700 additional annual net income for Hearne.

Project 3: Purchase a New Fleet of Delivery Trucks Hearne could purchase 25 new delivery trucks at a cost of $175,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $6,200. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $809,400 of additional net income per year.

3. Using a discount rate of 10 percent, calculate the net present value of each project. (Future Value of $1, Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided. Round your intermediate calculations to 4 decimal places and final answers to 2 decimal places.)

4. Determine the profitability index of each project and prioritize the projects for Hearne. (Round your intermediate calculations to 2 decimal places. Round your final answers to 4 decimal places.)

I need parts 3 and 4 answered from above. I have done 1 and 2 myself, but I keep getting 3 and 4 wrong. I can give you any more information if you need it. Thank you in advance!

Explanation / Answer

Project 1: Retooling Manufacturing Facility Year Cash Flow PV factor@10% PV of cash Inflows 0 5450000 1 -5450000 1 973000 0.909 884545.5 2 973000 0.826 804132.2 3 973000 0.751 731029.3 4 973000 0.683 664572.1 5 973000 0.621 604156.4 6 973000 0.564 549233.1 7 973000 0.513 499302.8 8 973000 0.467 453911.7 8 1144000 0.467 533684.4 NPV 274567.6 Profitability Index = Present Value of Future Cash Flows Initial Investment Required 0.050379 Project 2: Purchase Patent for New Product Year Cash Flow PV factor@10% PV of cash Inflows 0 3820000 1 -3820000 1 706700 0.909 642454.5 2 706700 0.826 584049.6 3 706700 0.751 530954.2 4 706700 0.683 482685.6 5 706700 0.621 438805.1 NPV -1141051 Profitability Index = Present Value of Future Cash Flows Initial Investment Required -0.2987 Project 3: Purchase a New Fleet of Delivery Trucks Year Cash Flow PV factor@10% PV of cash Inflows 0 4375000 1 -4375000 1 809400 0.909 735818.2 2 809400 0.826 668925.6 3 809400 0.751 608114.2 4 809400 0.683 552831.1 5 809400 0.621 502573.7 6 809400 0.564 456885.2 7 809400 0.513 415350.2 8 809400 0.467 377591.1 9 809400 0.424 343264.6 10 809400 0.386 312058.7 10 155000 0.386 59759.21 NPV 658171.8 Profitability Index = Present Value of Future Cash Flows Initial Investment Required 0.15043 RANK Project 3 Project 1 Project 2

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.