Flynn Corporation is debating whether to purchase a new computerized production
ID: 2351393 • Letter: F
Question
Flynn Corporation is debating whether to purchase a new computerized production system. The system will cost $450,000 and have an estimated 10-year life with a salvage value of $70,000. The estimated operating results from the new production system are as follows:
Incremental revenue $180,000
Incremental expenses:
Expenses other than depreciation $85,000
Depreciation (straight line basis) 38,000 ($123,000)
Incremental net income $57,000
All revenue and expenses other than depreciation will be received and paid in cash. Compute the following for this proposal:
a) Annual net cash flow: $ _________
b) Payback period:________years
c) Return on average investment: _________%
d) Net present value, discounted at an annual rate of 6% (present value of $1 due in 10 years, discounted at 6%, is 0.558; present value of $1 received annually for 10 years, discounted at 6% is 7.360): $_____
Explanation / Answer
a) Annual net cash flow = Incremental Net Income + Written back Dep = 57000+38000 = $ 95,000 b) Payback period:= (Initial Inv - Salvage)/Annual CF = (450000-70000)/95000 = 4years c) Return on average investment:= Annual Return/Initial Inv =$95000/450000= 21.11% d) Net present value, discounted at an annual rate of 6% NPV = Annual CFs + Initial Inv We have Annual CFs of 95000 for 10 Yrs. So PV = 7.360*95000 = 699200 We also have 70000 Salvage in Y10. So PV = 0.558*$70000 = 39060 So NPV = (699200+39060) - 450000 = 288260