5. Capital budgeting Flynn Corporation is debating whether to purchase a new com

Question

5. Capital budgeting Flynn Corporation is debating whether to purchase a new computerized production system. The system will cost $450,000, and have an estimated 10-year life with a salvage value of $70,000 The estimated operating results from the new production system are as follows cre $180,000 Incremental expenses $85,000 Expenses other than depreciation Depreciation (straight-line basis) 38,000 (123,000 cremental net income All revenue and expenses other than depreciation will be received and paid in cash. Compute the following for this proposal (a) Annual net cash flow: S (b) Payback period (c) Return on average investment years (d) Net present value, discounted at an annual rate of 6% (present value of $1 due in 10 years. discounted at 6%, is 0.558; present value of $1 received annually for 10 years, discounted at 6%. is 7.360): S

Explanation / Answer

a) Annual cash flow = 57000+38000 = 95000

b) Payback period = Initial investment/annual cash flow = 450000/95000 = 4.74 years

c) Return on average investment = Net income*100/Average investment

                                                = 57000*100/260000

Return on average investment = 21.92%

d) Net present value = Present value of cash inflow-Present value of cash outflow

                              = (95000*7.36+70000*.558)-450000

Net present value = 288260

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