Question

Vilas Company is considering a capital investment of $191,900 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 $16,000 and $49,800, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.

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(a)

Compute the cash payback period. (Round answer to 2 decimal places, e.g. 10.50.)

Cash payback period

years

Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.50.)

Annual rate of return

%

(b)

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 0 decimal places, e.g. 125. For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Net present value

Answer 1

a) Computation of cash payback period payback period &. Initial anvestment Net annual cash anflow = $191900 $49800 = 3.85 years in payback period = 3.85 years to computation of anbual rate of return CARRO ARR = Anneal het income Initial anvestment x 100 - I 16000 x100 $191 900 I 8.341. T ARR = 8.34%

present value 6 computation of het Net present value: Net annual anflows x praf@ 12% for 5 year Cinatial anvestment $ 49800 x 3•60478] - [$ 191900] El. - $ 12382 Li Net present value = - $12382 T