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.
Required:
a. Compute the cash payback period. (Round answer to 1 decimal place, e.g. 10.5.)
b. Compute the annual rate of return on the proposed capital expenditure. (Round answer to 2 decimal places, e.g. 10.52%)
c. Using the discounted cash flow technique, compute the net present value.

Answer 1

Answer:

Payback period    = 3.6  years

Annual rate of return = 11.50%

NPV  = 243.59  

Explanation:

The payback period: The estimated number of years it will take the initial cost to be recouped.

Payback period= initial cost/ Net cash inflow

                          = 183,600/51,000

                         = 3.6  years

Annual rate of return is the average annual income as a percentage of average investment

Annual rate of return = annual net income/ average investment

Average investment =( Initial,cost + scrap value)/2

                                 = (183,600 + 0)/2 = 91,800

Annual rate of return = (10,557/91,800)× 100

                                   = 11.50%

Net Present Value = The present value of cash inflow less the initial cost

PV of cash inflow = A × (1- (1+r)^(-n))/r

                             = 51,000 × (1- (1.12)^(-5)/0.12

                             =  183,843.59  

NPV = 183,843.59 - 183,600

       = 243.59