Project 1: Retooling Manufacturing Facility This project would require an initial investment of $4,920,000. It would generate $928,000 in additional net cash flow eac year. The new machinery has a useful life of eight years and a salvage value of $1,870,000. Project 2: Purchase Patent for New Product The patent wóuld cost $3,645,000, which would be fully amortized over five years. Production of this product would gener $583,200 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 $141,600 each. The fleet would have a useful life of 10 years, am each truck would have a salvage value of $5,700. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $234,000 of additional nét 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 ofț10 percent, calculate the net present value of each project. 4. Determine the profitabilîty index of each project and prioritize the projects for Hearne.
Project 1: Retooling Manufacturing Facility This project would require an initial investment of $4,920,000. It would generate $928,000 in additional net cash flow eac year. The new machinery has a useful life of eight years and a salvage value of $1,870,000. Project 2: Purchase Patent for New Product The patent wóuld cost $3,645,000, which would be fully amortized over five years. Production of this product would gener $583,200 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 $141,600 each. The fleet would have a useful life of 10 years, am each truck would have a salvage value of $5,700. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $234,000 of additional nét 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 ofț10 percent, calculate the net present value of each project. 4. Determine the profitabilîty index of each project and prioritize the projects for Hearne.
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter12: Capital Investment Analysis
Section: Chapter Questions
Problem 5BE
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In my class I am also having trouble finding payback period. When I initially tried this, I divided the cost of the patent by 5 years. What steps should I take to get the correct answer.
Transcribed Image Text:Project 1: Retooling Manufacturing Facility
This project would require an initial investment of $4,920,000. 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 $1,870,000.
Project 2: Purchase Patent for New Product
The patent wóuld 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.
Project 3: Purchase a New Fleet of Delivery Trucks
Hearne could purchase 25 new delivery trucks at a cost of $141,600 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 $234,000 of additional nét 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 offi0 percent, calculate the net present value of each project.
4. Determine the profitability index of each project and prioritize the projects for Hearne.
Complete this question by entering your answers in the tabs below.
Required 1
Required 2
Required 3
Required 4
Determine each project's payback period. (Round your answers to 2 decimal places.)
Payback Period
Project 1
5.30 years
Project 2
2.78 years
Project 3
40.78 years
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