Corn?eld Company is considering a long-term capital investment project in laser
ID: 2381592 • Letter: C
Question
Corn?eld Company is considering a long-term capital investment project in laser equip- ment. This will require an investment of $280,000, and it will have a useful life of 5 years. Annual net income is expected to be $16,000 a year. Depreciation is computed by the straight-line method with no salvage value. The company Corn?eld Company is considering a long-term capital investment project in laser equip- ment. This will require an investment of $280,000, and it will have a useful life of 5 years. Annual net income is expected to be $16,000 a year. Depreciation is computed by the straight-line method with no salvage value. The companyExplanation / Answer
(a)
Cost of investment = $280,000
Annual net cash inflows = Expected annual net income + annual depreciation = $16,000 + $56,000 = $72,000
Cash payback period = Cost of investment / Annual net cash inflows = $280,000/$72,000 = 3.89 years
(b)
Present value = Annual cash flows * Present value factor (10% for 5 year)= $72,000 * 3.79079 = $272,937
Net present value = Present value - Initial investment = $272,937 - $280,000 = $(7,063)
(c)
Annual rate of return = Annual profit / investment *100 = $16,000/ $280,000 * 100 = 5.71%
(d)
The net present value of the project is in negative. so, the project should not be accepted.