Meame Comp has a number of potential capital investments. Because these products
ID: 2591840 • Letter: M
Question
Meame Comp has a number of potential capital investments. Because these products vary in nature., initial investment, and time horizon, management is finding it difficult to compare them. Assuming straight line depreciation method is used.
Project #1 Retooling: Project would require initial investment of 5,500,000. it would generate 982,000 in additional net cash flows every year. The new machinery has a useful life of eight years and salvage value of 1,156,000.
Project #2 Purchase patent: The patent would cost 3,855,000 hich would be fully amortized over 5 years. production of this would generate 732,450 in additional annual net income for Hearne.
Project #3 purchase a new fleet of delivery trucks: Hearne could purchase 25 trucks at a cost of 180,000 each. The fleet would have a useful life of 10 years, and eaach truck would have a salvage value of 6,300. purchasing the fleet would allow hearne to expand its consumer territory resulting in 855,000 additional net income per year.
I was able to find ARR P1: 7.98% p2: 19% p3: 19% and i was able to find payback period P1: 5.60yr P2: 2.56yr P3: 3.49yr
(this is where I am stuck) Q3: "using a discount rate of 10% calculate the net present value of each project. (it gives links to Future value of $1, PV of 1$, FV of annuity 1$, and PV of annuity of 1$. "round intermediate calculations to 4 dcimal places and final answer to 2 decimal places.
Net Present Value Project 1: $278,145.80(this is right) Project2: ? Project3: ?
Q4: Determine the profitablility index for all three projects. P1: ? P2:? P3:?
For present value Project2 i used CF: (3855000) factor: 1$ for year: zero.... For the next i used CF: 732450 Table: Present Val of Annuity. Factor: 3.7908 Giving me a present Val of 2776571.46 (3855000)+2776571.46= (1078428.54) which connect is indicating as wrong.
for project 2 : year0 CF: (4500000)PV:(4500000) Year:1-10 CF: 855000 Table:PVA Factor: 6.1446 PV: 5,253,633 Year10: CF:6300(salvage) table PV1$ Factor: .3855 PV: 2428.65 final answer: (4,500,000)+5,253,633+2428.65= 756061.65 (again connect indicating as wrong)
Explanation / Answer
Solution 3:
Solution 4:
Profitability index = Present value of future cash flows / Initial Investment required
Project 1 = 5778145 / 5500000 = 1.05
Project 2 = 5699128 / 3855000 = 1.48
Project 3 = 7982513 / 4500000 = 1.77
Computation of NPV - All Projects Particulars Project 1 - Retooling Project 2 - Purchase Patent Project 3 - Purchase a new fleet of delivery trucks Amount Period PV Factor Present Value Amount Period PV Factor Present Value Amount Period PV Factor Present Value A - Cash Outflows: Initial Investment $5,500,000.00 0 1 $5,500,000.00 $3,855,000.00 0 1 $3,855,000.00 $4,500,000.00 0 1 $4,500,000.00 B - Cash Inflows Additional annual Net Income $732,450.00 $855,000.00 Add: Depreciation / Amortization $771,000.00 $434,250.00 Additional annual cash flows $982,000.00 8 5.3349 $5,238,871.80 $1,503,450.00 5 3.7907 $5,699,127.92 $1,289,250.00 10 6.1445 $7,921,796.63 Salvage Value $1,156,000.00 8 0.4665 $539,274.00 $0.00 5 0.6209 $0.00 $157,500.00 10 0.3855 $60,716.25 Net Present Value (B-A) $278,145.80 $1,844,127.92 $3,482,512.88