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 $4,900,000. It would generate $874,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,012,000. Project 2: Purchase Patent for New Product The patent would cost $3,435,000, which would be fully amortized over five years. Production of this product would generate $446,550 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 $120,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,100. Purchasing the fleet would allow Hlearne to esgane is customer beitory reuinin $50,00 dfaa et income er 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 3 732 1300 12.00 %

Explanation / Answer

Answers to questions 1,2 & 3 as worked and given in the tables are correct.

Answers to question 4 is given below:

project 1 project 2 project 3 initial investment 4900000 3435000 3000000 life in years 8 5 10 salvage value 1012000 0 127500 yearly net cash flow 874000 1133550 647250 pvifa @ 10% 5.3349 3.7908 6.1446 PV of cash flows 4662703 4297061 3977092 Pvif @ 10% for salvage value 0.4665 0.6209 0.3855 pv of salvage value 472098 0 49151 Total PV of inflows 5134801 4297061 4026244 NPV 234801 862061 1026244 Profitability Index 1.0479 1.2510 1.3421 Ranking 3 2 1

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