Question

Exercise 12-10 (Video)

Vilas Company is considering a capital investment of $198,900 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 $13,923 and $51,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.

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(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

Ans. A	Cash payback period = Initial investment / Annual cash inflows
		$198,900 / $51,000
		3.90	years
	*For the calculation of annual rate of return, we need to find out the value of
	average investment.
	*Average investment =   (Cost of asset + Salvage value) / 2
		($198,900 + $0) / 2
		$99,450
	Annual rate of return =   Net income / Average investment * 100
		$13,923 / $99,450 * 100
		14.00%
Ans. B	Present value of cash inflow = Annual cash inflows * Present value of an annuity of 1 of 12%
		$51,000 * 3.60478
		$183,843.78
	Present value of cash inflows	$183,843.78
	Less: Investment	-$198,900
	Net present value	-$15,056
	*Calculation of Present value factors:   (PV @ 12%)
	Year		PV @ 12%
	1	1 / (1 + 0.12)^1	0.89286
	2	1 / (1 + 0.12)^2	0.79719
	3	1 / (1 + 0.12)^3	0.71178
	4	1 / (1 + 0.12)^4	0.63552
	5	1 / (1 + 0.12)^5	0.56743
	Total of Present value of an annuity		3.60478