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 $5,250,000. It would generate $937,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,096,000. Project 2: Purchase Patent for New Product The patent would cost $3,680,000, which would be fully amortized over five years. Production of this product would generate $607,200 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 $155,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,800. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $639,400 of additional net income per year. Required: 1. Determine each project's accounting rate of return. (Round your answers to 2 decimal places.) Answer is complete and correct. Project 1 Project 2 Project 3 Accounting Rate of Return 7.96 % 16.50 % 16.50 % 2. Determine each project's payback period. (Round your answers to 2 decimal places.) Answer is not complete. Project 1 Project 2 Project 3 Payback Period 5.60 Years 2.74 Years Years

Answer 1

Page No Answer o Accounting waste of returns Project! Annual cash flows = $934000 Depreciation = $5250,000 - 1096000 8years = $519250 Annual net cash flows = 937000 - 519250 = $414450 414750 Aceconting rate of return = X100 5250,000 e 7.96% 1 Project a Annual net cashflows = $60420 0 Acounting rate of reborn = 604800 xico 3680,000 16.50% =

Page No ③ Annual al cashflows = $639400 Inibicek investment - 25% $155000 . = $3875000 Accounting rate of return = 63 639400X100 3875000 - 16.50% 2. Projects I - Aconting scate of return = 4.967. Project Q - Accounting rate of retwin = 16.50% Project 3 - Accounting cate georeturn = 16.50% @ Porce lang Paybacks period - Payback period Initial Coverfments Annual net cash flowers Project I, Payback periode 5250.000 934000 = 5.60 years

Page No ③ Projet a , Payback period - 3680,000 604200 + 3680,000 - 5 years 3680,000 609200 + 736000 3680,000 1343200 3.2074 years 3875000 639400 + 3875000 I to years 3875000 639400 + 387500 3875000 1026900 = 3.47 years ... Project In Payback period = 5.60 years Project 2 - Payback period = 2.74 years I Project 3 - Payback period = 3074 years

③ Project ! Page, No 9 Errol, 8) = -> 01= 10%., 1-8 Titan (14604) · = 0.4665073802 PVIFA (107,8). 1 - Cit.107.) 8 107 51334926198 Project ! Net present value = -5250,000 +(934000 x 51 334961787 + (1096000 X 0.46650738 = -5250,000 + 4998825.848 + 611292.0887 260114.94 1 Project 1.- Net present value = $060117194 Project a Net present value = - 3680©©o +604000W DUIFA (107. 6736000)

= -3620.000 + 1343200 x 1-Cortosa p Page.no © 10% = - 3680000 + (1343300 x 3,-490486769) = - 3680,000 + 5091784.788 = $ 1411484179 - Project 2 - Net present value = $1411784.79 Pooject 3 Nebe present value = -(05 X155000)+10124°OX PUIFA (10º1 10)) +(145000 XPVIE (OX,10) (1.639400 + 1 (387500 - 14500 = 1012400) = -3845000 + (1012400 x 1-C1t07:310) + (145000 x 0.3855432894) = -3875000 + (1012400 X6144567106) + 55903.77696 = - 3875000 + 6220759.738 +55903171696 = 240 1663.515 L: Project 3 - Net present Value = $24016631527

Page No ③ A project profitability andle :- Paojiet et Q60119.947 5250000 Project profitability index ='s 5250000 = 1.0495 Projecta Project profitability index = 1411 484.79 + 3680000 3680000 13836 Projects 3 Project 240 1663.515 + 3875000 Profitability index = 3845000 = 1.6198 Project profitability index Rank 1.0495 w Project I Project a Project 3 6 1:3836 - 1.6198