Exercise 24-10 Vilas Company is considering a capital investment of $190,000 in

Question

Exercise 24-10 Vilas Company is considering a capital investment of $190,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $12,000 and $50,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment. Click here to view the factor table For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.) Cash payback period Compute the annual rate of return on the proposed capital expenditure. (Round answer to 1 decimal place, e.g. 20.5.) Annual rate of return Using the discounted cash flow technique, compute the net present value. (If the net present value is negative, use either a negative sign preceding the number e.g.-45 or parentheses e.g. (45) Round answer for present value to O decimal places, e.g. 125.) Net present value

Explanation / Answer

Solution:

Cash Payback Period = 3.8 years

Annual Rate of Return = 12.63%

Net Present Value = -9,761.19

Working:

1) ) Cash Payback Period = Capital investment / Net annual cash flows

Cash Payback Period = 190,000/50,000 = 3.8 years

2) Annual Rate of Return = Annual Net Income/Average Investment

= 12,000 / (190,000/2) = 12.63%

3) Net Present Value = - Capital investment + Net annual cash flows *PVIFA(rate,nper)

= -190,000 + 50,000 * PVIFA(12%,5)

= -190,000 + 50,000 * 3.60478

= -190,000 + 180,238.81

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