Hearne Company has a number of potential capital investments.Because these projects vary in nature, initial investment, and timehorizon, management is finding it difficult to compare them.
Project 1: Retooling Manufacturing Facility This project wouldrequire an initial investment of $4,850,000. It would generate$865,000 in additional net cash flow each year. The new machineryhas a useful life of eight years and a salvage value of$1,000,000.
Project 2: Purchase Patent for New Product The patent would cost$3,400,000, which would be fully amortized over five years.Production of this product would generate $425,000 additionalannual net income for Hearne.
Project 3: Purchase a New Fleet of Delivery Trucks Hearne couldpurchase 25 new delivery trucks at a cost of $115,000 each. Thefleet would have a useful life of 10 years, and each truck wouldhave a salvage value of $5,000. Purchasing the fleet would allowHearne to expand its customer territory resulting in $200,000 ofadditional net income per year.
Required: SHOW ALL WORK
Using a discount rate of 10 percent, calculate the net presentvalue of each project.
Determine the profitability index of each project and prioritizethe projects for Hearne.
Hearne Company has a number of potential capital investments.Because these projects vary in nature, initial investment, and timehorizon, management is finding it difficult to compare them.
Project 1: Retooling Manufacturing Facility This project wouldrequire an initial investment of $4,850,000. It would generate$865,000 in additional net cash flow each year. The new machineryhas a useful life of eight years and a salvage value of$1,000,000.
Project 2: Purchase Patent for New Product The patent would cost$3,400,000, which would be fully amortized over five years.Production of this product would generate $425,000 additionalannual net income for Hearne.
Project 3: Purchase a New Fleet of Delivery Trucks Hearne couldpurchase 25 new delivery trucks at a cost of $115,000 each. Thefleet would have a useful life of 10 years, and each truck wouldhave a salvage value of $5,000. Purchasing the fleet would allowHearne to expand its customer territory resulting in $200,000 ofadditional net income per year.
Required: SHOW ALL WORK
Using a discount rate of 10 percent, calculate the net presentvalue of each project.
Determine the profitability index of each project and prioritizethe projects for Hearne.
Related questions
Hearne Company has a number of potential capital investments.Because these projects vary in nature, initial investment, and timehorizon, management is finding it difficult to compare them. Assumestraight line depreciation method is used. |
| Project 1: RetoolingManufacturing Facility | ||||||||||||
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 salvagevalue of $1,084,000. | ||||||||||||
| Project 2: PurchasePatent for New Product | ||||||||||||
The patent would cost $3,645,000, which would be fully amortizedover five years. Production of this product would generate $583,200additional annual net income for Hearne. | ||||||||||||
| Project 3: Purchase aNew Fleet of Delivery Trucks | ||||||||||||
| Hearne could purchase 25 new delivery trucks at a cost of$150,000 each. The fleet would have a useful life of 10 years, andeach truck would have a salvage value of $5,700. Purchasing thefleet would allow Hearne to expand its customer territory resultingin $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 timehorizon, management is finding it difficult to compare them. Assumestraight line depreciation method is used. |
| Project 1: RetoolingManufacturing Facility |
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 salvagevalue of $1,084,000. |
| Project 2: PurchasePatent for New Product |
The patent would cost $3,645,000, which would be fully amortizedover five years. Production of this product would generate $583,200additional annual net income for Hearne. |
| Project 3: Purchase aNew Fleet of Delivery Trucks |
Hearne could purchase 25 new delivery trucks at a cost of$150,000 each. The fleet would have a useful life of 10 years, andeach truck would have a salvage value of $5,700. Purchasing thefleet would allow Hearne to expand its customer territory resultingin $600,000 of additional net income per year. |
| Required: | |||||||
| 1. | Determine each project's accounting rate of return.(Round your answers to 2 decimal places.)
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