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.
This project would require an initial investment of $5,200,000. It would generate $928,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,084,000.
The patent would cost $3,645,000, which would be fully amortized over five years. Production of this product would generate $583,200 additional annual net income for Hearne.
Hearne could purchase 25 new delivery trucks at a cost of $150,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,700. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $600,000 of additional net income per year.
| 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. |
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 Project 2 Project 3 Years Years Years . using a discount rate 3. Using a discount rate of 10 percent, calculate the net present value of each teoro rom 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.) rcre alue of , resn lclate the net present valve of osc Net Present Value Project 1 Project 2 Project 3 4. 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.) Profitability Rank Index Project 1 Project 2 Project 3
Project 1 project cost 5200000 scrapvalue 1084000 4116000 life 8 years Depreciation 514500 Year cash flow depreciation profit after depreciation present value factor @10% present value of cash flow 1 928000 514500 413500 0.909091 843636.4 2 928000 514500 413500 0.826446 766942.1 3 928000 514500 413500 0.751315 697220.1 4 928000 514500 413500 0.683013 633836.5 5 928000 514500 413500 0.620921 576215 6 928000 514500 413500 0.564474 523831.8 7 928000 514500 413500 0.513158 476210.7 8 928000 514500 413500 0.466507 432918.8 1084000 0.466507 505694 present value of cash flow present value of cash flow 5456506 For average rate of return we use cash flow after depreciation and tax cash outflow cash outflow 5200000 Average Profit 1654000 NPV NPV 256505.5 Average investment 2600000 PI present value of cash flow/cash outflow 1.049328 Average Rate of return average Profit/average Investment 63.61538 Pay back Period 5.10 Year Year cumulative cash flow 1 928000 928000 2 928000 1856000 3 928000 2784000 4 928000 3712000 5 928000 4640000 amount recovered upto 5th year 6 928000 5568000 560000 7 928000 8 928000 Pay BacK period 5.100575 Project 2 Project cash outflow 3645000 5 729000 Year net income amortized amount Profit before amortized amount present value factor @10% present value of cash flow Year amortized amount cumulative value 1 583200 729000 1312200 0.909091 1192909 1 1312200 1312200 2 583200 729000 1312200 0.826446 1084463 2 1312200 2624400 amount recovered upto year 2 3 583200 729000 1312200 0.751315 985875.3 3 1312200 = 1020600 amount to be recovered 4 583200 729000 1312200 0.683013 896250.3 4 1312200 5 583200 729000 1312200 0.620921 814773 5 1312200 present value of cash flow present value of cash flow 4974270 Pay back period 2.777778 Years cash outflow cash outflow 3645000 NPV NPV 1329270 PI present value of cash flow/cash outflow 1.364683 Average Rate of return average Profit/average Investment 0.32 32% Pay back Period pbp 2.777778 total amount recovered in 5 Years and amount left to be recovered 3645000-2916000 Project 3 cash outflow 1500000 scrap value 57000 1443000 Depreciation 144300 Year net income depreciation net income after depreciation present value@10% 1 600000 144300 744300 0.909091 676636.4 2 600000 144300 744300 0.826446 615124 3 600000 144300 744300 0.751315 559203.6 4 600000 144300 744300 0.683013 508366.9 5 600000 144300 744300 0.620921 462151.7 6 600000 144300 744300 0.564474 420137.9 7 600000 144300 744300 0.513158 381943.6 8 600000 144300 744300 0.466507 347221.4 9 600000 144300 744300 0.424098 315655.9 10 600000 144300 744300 0.385543 286959.9 57000 0.385543 21975.97 present value of cashflow present value of cashflow 4595377 cash outflow cash outflow 1500000 NPV NPV 3095377 average profit 600000 PI PI 3.063585 average investment 750000 Average rate of return Average rate of return 80 Average rate of return 80 Year net income PBP 2.015316 1 744300 744300 2 744300 1488600 amount recovered upto Year 2 3 744300 2232900 11400 amount to be recovered in Year 3 4 744300 5 744300 6 744300 7 744300 8 744300 9 744300 10 744300 57000 Pay back period 2.015316 Years Project A B C NPV 256505.5 1329270 3095377 dollars PI 1.049328 1.364683 3.063585 ARR 63.61538 32% 80 PERCENT PBP 5.10 Year 2.777778 2.015316 Years
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