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. (Future Value of $1. Present Value of $1, Future Value Annuity of $1, Present Value Annuity of $1.) (Use appropriate factor(s) from the tables provided.) Project 1: Retooling Manufacturing Facility This project would require an initial investment of $4,860,000. It would generate $874,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,410,000. Project 2: Purchase Patent for New Product The patent would cost $3,435,000, which would be fully amortized over five years. Production of this product would generate $446,550 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 $118,800 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,100. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $210,000 of additional net income per year. Required: 1. Determine each project's accounting rate of return. 2. Determine each project's payback period. 3. Using a discount rate of 10 percent, calculate the net present value of each project. 4. Determine the profitability index of each project and prioritize the projects for Hearne. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Required 4 Determine each project's accounting rate of return. (Round your answers to 2 decimal places.) Accounting Rate of Return Project 1 Project 2 Project 3

Answer 1

Annual Calculation of Present Value of Project Project Year Cash inflow Puf@10% Present Value of Cach flow 1-8___ $824,000__6014__ $5,366.360 _$1$10,000__ .38_ $_5_35,800 - $5.904160 Averagen Preacut Value of cash inflow $5902160 = $961263.84 6:14 Project 2 Year Cash in flow Puf@ 104. Present Value 11-5 $3,435 _3446,550 3.79_ $ 269924.50 + dverage annual present value of Ceah_inflow $4692,424.50 $ 146.550 -~ Project 3 Year Cash inflow Prf@ 10% Present Value 1-10 $210,000 6.14 $ 1,289,500 •38 I to $ 127,500 $ 48,450 8:79 $1337,850

Average annual_cashiofloc. 337,850 __ 614 = $_217890-87 - Accounting hate of Return Project L_3_$961.263.84 X100_ $4,860,002 pe&7400D 19.79 Project 2 $ 446,550x100 $ 3,435,000 la 13% - Project 3. 27890-87_XIRD -$2970,000 27-33% I Calculation of Payback I Project Project & = $4860,000 -$3435.00 $446,550 T= 5.05 yrs | =769 years period Project 3 -$2990,000 $217890.87 = 13.63 years $ 961 263.87 I

- Net Prescut Value Project L - Present Value of Cash in flow - = $ 5,902160 NPV - $ 10 4 2160 Initial Povestonent - 48.60,000 Project 2 - $ 1,69 2,4 2 4.50 - $ 3,435,000 Apv=${1742575:50) Project 3 = $ 1337,850 - $ 2970,000 _NPV = $(16.32150) Profitabicily I Projects = Torclay - Present Values of cash infloxo - Initial Investment $5,902,160 = 1.2144 $4860,000 $ 1692,424.50 = 0.4927 $ 3,435,00 Project 2 = Project 3 = _ $ 1,337,850 = 0.4504 _2970,000__