.3.00 points Hearne Company has a number of potential capital Investments, Becau
ID: 2457361 • Letter: #
Question
.3.00 points Hearne Company has a number of potential capital Investments, Because these projects vary in nature. nital investment, and time horizon, management is finding it difficult tb compare them. Assume straight B depreciation method is used. Project 1: Retooling Manufacturing Facility This project would require an initial investment of $4,850,000.It would generate $865,000 in additional cash fow each year. The new machinery has a useful life of eight years and a salvage value of $1,000,0 Project 2: Purchase Patent for New Product The patent would cost $3,400,000, which would be fully amortized over five years Production of this product would generate $425,000 additional annual net income for Heame. Project 3: Purchase a New Fleet of Delivery Trucks Heame could purchase 25 new delivery trucks at a oost of $115,000each The feet would have a useful le of 10 years, and each truck would have a sahage v to expand its customer temitory resulting in $200,000 of additional net income per year value of $5,000. Purchasing the feet would allow Heame Deemine each popecrs acountrg rate of retm (Round your answe, to 2 decimal 791% Project 1 Project 2 Project 3 12.50 % 2. Determine each projact's payback period. (Round your answers to 2 decimal places) 4Explanation / Answer
Project 1
Initial Investment = 4850000
Annual Cash Flow = 865000
Salvage Value = 1000000
Useful Life = 8
Annual Depreciation = (Cost - Salvage Value)/Useful Life
Annual Depreciation = (4850000-1000000)/8
Annual Depreciation = 481250
Annual Net Income = Annual Cash Flow - Annual Depreciation
Annual Net Income = 865000-481250
Annual Net Income = 383750
Average Investment = (Initial Investment + Salvage Value)/2
Average Investment = (4850000+1000000)/2
Average Investment = 2925000
Accounting Rate of Return = Annual Net Income/Average Investment
Accounting Rate of Return = 383750/2925000
Accounting Rate of Return = 13.12%
Project Payback period = Initial Investment/Annual Cash Flow
Project Payback period = 4850000/865000
Project Payback period = 5.61 year
NPV = -Initial Investment + Annual Cash flow *PVIFA(rate,nper) + Salvage Value*PVIF(rate,nper)
NPV = - 4850000 + 865000*PVIFA(10%,8) + 1000000*PVIF(10%,8)
NPV = - 4850000 + 865000*5.33493 + 1000000*0.46651
NPV = $ 231,224.45
PI = (1+ NPV/Initial Investment)
PI = (1+ 231224.45/4850000)
PI = 1.0477
Project 2
Initial Investment = 3400000
Annual Net Income = 425000
Useful Life = 5
Annual Amortisation = (Cost - Salvage Value)/Useful Life
Annual Amortisation = (3400000-0)/5
Annual Amortisation = 680000
Annual Cash Flow = Net Income + Amortisation cost
Annual Cash Flow = 425000+680000
Annual Cash Flow = 1105000
Average Investment = (Initial Investment + Salvage Value)/2
Average Investment = (3400000+0)/2
Average Investment = 1700000
Accounting Rate of Return = Annual Net Income/Average Investment
Accounting Rate of Return = 425000/1700000
Accounting Rate of Return = 25%
Project Payback period = Initial Investment/Annual Cash Flow
Project Payback period = 3400000/1105000
Project Payback period = 3.08 year
NPV = -Initial Investment + Annual Cash flow *PVIFA(rate,nper) + Salvage Value*PVIF(rate,nper)
NPV = - 3400000 + 1105000*PVIFA(10%,5)
NPV = - 3400000 + 1105000*3.79079
NPV = $ 788,822.95
PI = (1+ NPV/Initial Investment)
PI = (1+ 788822.95/3400000)
PI = 1.2320
Project 3
Initial Investment = 25*115000 = 2875000
Annual Net Income = 200000
Salvage Value = 5000*25 = 125000
Useful Life = 10
Annual Depreciation = (Cost - Salvage Value)/Useful Life
Annual Depreciation = (2875000-125000)/10
Annual Depreciation = 275000
Annual Cash Flow = Net Income + Depreciation
Annual Cash Flow = 120000+275000
Annual Cash Flow = 395000
Average Investment = (Initial Investment + Salvage Value)/2
Average Investment = (2875000+125000)/2
Average Investment = 1500000
Accounting Rate of Return = Annual Net Income/Average Investment
Accounting Rate of Return = 120000/1500000
Accounting Rate of Return = 8%
Project Payback period = Initial Investment/Annual Cash Flow
Project Payback period = 2875000/395000
Project Payback period = 7.28 year
NPV = -Initial Investment + Annual Cash flow *PVIFA(rate,nper) + Salvage Value*PVIF(rate,nper)
NPV = - 2875000 + 395000*PVIFA(10%,10) + 125000*PVIF(10%,10)
NPV = - 2875000 + 395000*6.14457 + 125000*0.38554
NPV = - $ 399,702.35
PI = (1+ NPV/Initial Investment)
PI = (1- 399702.35/2875000)
PI = 0.8610
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