Hearne Company has a number of potential capital investments. Because these proj

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 $5,700,000. It would generate $1,018,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,204,000.
Project 2: Purchase Patent for New Product
The patent would cost $3,995,000, which would be fully amortized over five years. Production of this product would generate $838,950 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 $200,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $6,700. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $1,050,000 of additional net income per year.
Required:
1.Determine each project's accounting rate of return. (Round your answers to 2 decimal places.)
Accounting Rate of Return
Project 1   ???   %
Project 2   ???   %
Project 3   ???   %
2.Determine each project's payback period. (Round your answers to 2 decimal places.)
Payback Period
Project 1   ???   Years
Project 2   ???   Years
Project 3   ???   Years
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.)
Net Present Value
Project 1 ??
Project 2 ??
Project 3 ??
  
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.)
Probability Index   Rank
Project 1 ???? ??
Project 2 ???? ??
Project 3 ???? ??

Explanation / Answer

1)

2)

3)

4)

ARR = Average Accounting profit / Avearge investment Particulars project 1 project 2 Project 3 (a) Cost of the machine ($) 5700000 3995000 5000000 (b) Salvage Value($) 1204000 0 167500 (c) Depreciable Value - (a - b)($) 4496000 3995000 4832500 (d) Useful life in years 8 5 10 (e) Deprciation per year - c/d ($) 562000 799000 483250 (f) Average investment - (a+b) / 2 ($) 3452000 1997500 2583750 (g) Cash flows per year ($) 1018000 1637950 1533250 (h) Depreciation per year ($) 562000 799000 483250 (i)Average Accounting profit per year - (g-h) ($) 456000 838950 1050000 ARR - (i / f) x 100 % 13.21% 42.00% 40.64%

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