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 $5,300,000. It would generate $946,0000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,108,000. Project 2: Purchase Patent for New Product The patent would cost $3,715,000, which would be fully amortized over five years. Production of this product would generate $631,550 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 $160,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,900. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $680,000 of additional net income per year. Required: 1. 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 2. Determine each project's payback period. (Round your answers to 2 decimal places.) Payback Period Project 1 Years Project 2 Project 3 Years Years 3. Using a discount rate of 10 percent, calculate the net present value of each project. (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. Round your intermediate calculations to 4 decimal places and final answers to 2 decimal places.) Net Present Value Project 1 Project 2 Project 3

Answer 1

1) computation of projects accounting rate of return CARR) oitowane p ARR = Net Income pia x 100 o d Infitqar anvestment I Accounting rate of retu proiect - 2 17.85 13 $946000 XIОО $ 5300 000 project - 2 17 I $631550' WIDO L$ 3715000 Project - 3 17 $ 680.000 X 100 $ 40,00.000

to 2) computation of projects payback period Payback period Initial investment un cash anflow p.a o payback period project - 5.60 5.60 years! $.53 oo ooo $946000 project - 2 5.88 2 years $ 3715000 E$631550 project - 311 5.88 - 2 years 8 4600,000 L $ 680000

2 . 3 oction projects 12 - 3 Annual cash onllow $946000 $631550 $ 6,80,000 DVA F@10/ 15:3349 3.7903861445 6.14457 present valle of cash anflows $5046815 $2394067 $4178307.6 Salvage value $1108.000 $147500 per factor 0.4665 0.38554 present value of Salvage value $516882 - $ 56867.15 total present value of cash. anfeous $5563697 $2394067 $4235174.75 & initial Gnvestment $5300000 $3715000 $40,00.000 Net present value $2636974 - $1320932 $235174.75 99

Net present value $263697140 project - 1 project - 2 $ 1320932.8902 Cono. $.23547675 " project - 3 SO )