Hearne Company has a number of potential capital investments. Because these proj
ID: 2469851 • Letter: H
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.
This project would require an initial investment of $5,200,000. It would generate $928,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,084,000.
The patent would cost $3,645,000, which would be fully amortized over five years. Production of this product would generate $583,200 additional annual net income for Hearne.
PLEASE FILL OUT THE BOXES THAT ARE BLANK
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.
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 7 .95 % 16.00 % 2. Determine each project's payback period. (Round your answers to 2 decimal places.) Payback Project 1 Project 2 Project 3 Period 5.60 Years 2.78 Years 3.90 Years . using a discount rate 3. Using a discount rate of 10 percent, calculate the net present value of each teoro rom 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.) rcre alue of , resn lclate the net present valve of osc Net Present Value Project 1 S 256,505.50 Project 2 $1,329,270.00 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.) Profitability Rank Index Project 1 Project 2 Project 3 1.0493 1.3647 2Explanation / Answer
AVERAGE RATE OF RETURN (ARR)
= AVERAGE ACCOUNTING PROFIT / AVERAGE INVESTMENT
= $600000 / ($150000 * 25)
= 0.16 OR 16%
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NPV
INIITIAL CASH FLOW = $150000 * 25 = $3750000
INBETWEEN CASH FLOW
= $600000 + DEPRECIATION
= $600000 + [($150000 - $5700) / 10] * 25
= $960750
TERMINAL CASH FLOW
= $5700 * 25
= $142500
NPV = ($3750000) + $960750 * PVIFA 10%, 10 PERIODS + $142500 * PVIF 10%, 10 PERIOD
= ($3750000) + $960750 * 6.1446 + $142500 * 0.3855
= ($3750000) + $5903424.45 + $54933.75
= $2208358.2
--------------------------------------------------------------------------------------------------------------------------------------------------PROFITABILITY INDEX
= 1 + (NPV / INITIAL INVESTMENT)
= 1 + ($2208358.2 / $3750000)
= 1 + 0.59
= 1.59
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