Question

Vilas Company is considering a capital investment of $183,600 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 $10,557 and $51,000, respectively. Vilas has a 12% cost of capital rate, which is the required rate of return on the investment.

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

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

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.)

Answer 1

year	net income	+	Depreciation	Cash flow (including Depreciation)	Discounting factor (12%)	discounted cash flow (present value of cash flow)
1	10,557	+	36,720	47,277	0.8929	42214
2	10,557	+	36,720	47,277	0.7972	37689
3	10,557	+	36,720	47,277	0.7118	33652
4	10,557	+	36,720	47,277	0.6355	30045
5	10,557	+	36,720	47,277	0.5674	26825
	52,785					170424

1) Cash payback period

Payback period = Initial Investment / Cash flow

= 183,600 / 47,277

= 3.88 years

2) Annual rate of return on capital expenditure

Annual Rate of Return = Average annual net profit                                                 Average Investment                                               = 10,557 / 91,800                                               = 0.115 x 100 = 11.5%

Average annual net profit = total net profit / useful life

= 52,785 / 5

= 10,557

Average investment = Initial Investment + salvage value / 2                                            = 183,600 + 0 / 2                                            = 91,800

3) Net Present value

NPV = present value - initial investment

= 170,424 - 183,600

= (13,176)