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 $5,800,000. It would generate $1,036,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,228,000. Project 2: Purchase Patent for New Product The patent would cost $4,065,000, which would be fully amortized over five years. Production of this product would generate $894,300 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 $210,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $6,900. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $1,155,000 of additional net income per year. Required: 1. Determine each project's accounting rate of return. (Round your answers to 2 decimal places.) X Answer is not complete. Accounting Rate of Return Project 1 Project 2 Project 3 % 22.00 22.00

Answer 1

u computation of accocenting rate of return CARR) ARR = Net anonse - X1oo Rofiti al anvestment project - 1 Accocenting rate of return 17.86 $10 36000 Xco $5800000 project -2 I proiect -3 $894300 x100 $4065800 o 22 Is 1155000x100 $5250000 Tolo. (2) computation payaback period o payback period - Initial investment OP Annual net cash inflows

years project- years project - 5.60 s 5800 000 BO36000 4.55 $ 4065000 1 894300 4.55 $ 52500006 81155 000 years project -3 13 competation of NPV I projects 3 Net cash inflao $1036000 $894300 $ 155000 cost of capital 107 I lol lol. osepcel efe 18 0 5 I 10 PVAR 5.3348 8.7907 6.1445 a present value of eash anflows 5526956/3390023 7096898 salvage value 1229000 1 1 72500 pra 0.4665 03855 b) present value of saluge value 572862 662499 c) Total present value 6099818/ 3390023 7163396 catb) e Initial investment 5800000 4065ood 5250oool d) Net NTV 299818 - 6749771913396

profitability index 4 computation of profitability and exe: - present value of future cash anflows Initial onueshment Rank project - project - 2 propotability andere I 1:05172 $ 6o99818 $ 58260,000 0.8320 $ 3390823 $ 40 65000 1.3645 $ 763396 $ 5250 000 progect - 3