Question

Exercise 12-10 (Video)

	Your answer is partially correct. Try again.

Vilas Company is considering a capital investment of $193,500 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 $12,771 and $45,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.

Click here to view PV table.

(a)

Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.)

Cash payback period

years

Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.52%.)

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)

Payback period = Initial Investment/ Periodic cash flow

                          = $ 193,500/ $ 45,000 = 4.3 years

Cash payback period of the investment is 4.3 years

b)

Annual rate of return = Net annual income/ (Average Investment)

                                  = $ 12,771 / ($ 193,500 - $ 0)/2

                                = $ 12,771/$ 96,750 = 0.1320 or 13.20 %

Annual rate of return of the investment is 13.20 %

c)

NPV = PV of cash inflows – Initial investment

      = $ 45,000 x PVIFA (12 %, 5) - $ 193,500

      = $ 45,000 x 3.60478 - $ 193,500

      = $ 162,215.10 - $ 193,500

      = - $ 31,284.90 or - $ 31,285

Net Present Value of the investment is - $ 31,285.