In: Accounting
Hearne Company has a number of potential capital investments.
Because these projects vary in nature, initial...
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 $4,910,000. It
would generate $919,000 in additional net cash flow each year. The
new machinery has a useful life of eight years and a salvage value
of $1,860,000.
Project 2: Purchase Patent for New Product
The patent would cost $3,610,000, which would be fully amortized
over five years. Production of this product would generate $559,550
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 $137,800
each. The fleet would have a useful life of 10 years, and each
truck would have a salvage value of $5,600. Purchasing the fleet
would allow Hearne to expand its customer territory resulting in
$233,000 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.
Determine each project's accounting rate of return. (Round your
answers to 2 decimal places.)
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Accounting Rate of Return
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Project 1
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%
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Project 2
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%
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Project 3
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%
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Determine each project's payback period. (Round your answers to
2 decimal places.)
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Payback Period
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Project 1
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years
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Project 2
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years
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Project 3
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years
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Using a discount rate of 10 percent, calculate the net present
value of each project. (Round your intermediate calculations to 4
decimal places and final answers to 2 decimal places.)
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Net Present Value
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Project 1
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Project 2
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Project 3
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Determine the profitability index of each project and prioritize
the projects for Hearne. (Round your intermediate calculations to 2
decimal places. Round your final answers to 4 decimal places.)
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Profitability Index
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Rank
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Project 1
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Project 2
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Project 3
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ekkarill92 answered 1 year ago