solution
solution.
Analyzing a Capital Investment Proposal (LO26-1, LO26-3) 7.5 points Ferrent is debating whether to invest in new equipment to manufacture industrial distilling vats. The new equipment would cost $900,000 and would have an estimated four-year life and no salvage value. The estimated annual operating results with the new equipment are as follows:
Revenue from sales of industrial distilling vats = $996,000
Expenses other than depreciation= $675,000
Depreciation (straight-line basis)= $225,000 900,000
Increase in net income from industrial distilling vats $96,000
All revenue from the sale of industrial distilling vats and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.
a. Compute the annual cash flows for Ferrent’s investment in the new equipment.
b. Compute the payback period for Ferrent’s investment in the new equipment. (Round your answer to 1 decimal place.)
c. Compute the return on average investment for Ferrent’s investment in the new equipment. (Round your percentage answer to 1 decimal place (i.e., 12.34 to be entered as 12.3).)
d. Compute the total present value of the expected future annual cash inflows, discounted at an annual rate of 10 percent for Ferrent’s investment in the new equipment. (Round your “PV factor” to 3 decimal places and final answer to the nearest dollar amount.)
e. Compute the net present value of the proposed investment discounted at 10 percent for Ferrent’s investment in the new equipment. (Enter negative value with a minus sign. Round your “PV factor” to 3 decimal places and final answer to the nearest dollar amount.)
a. Annual cash flows
b. Payback period
c. Return on average investment
d. Total present value
e. Net present value years %
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