Carper Company is considering a capital investment of $390,000 in additional productive facilities. The new machinery is expected to have useful life of 6 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $20,000 and $85,000, respectively. Carper has an 8% cost of capital rate, which is the required rate of return on the investment. Instructions (Round to two decimals.) a. Compute (1) the cash payback period and (2) the annual rate of return on the proposed capital expenditure. b. Using the discounted cash flow technique, compute the net present value. c. Carper was presented with a second capital investment that provided similar production facilities as the first one. This investment cost $400,000, had a useful life of 7 years with a salvage value of $15,000. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $25,000 and $80,000 respectively. Carper's 8% cost of capital is also the required rate of return on the investment.

Carper Company is considering a capital investment of $390,000 in additional productive facilities. The new machinery is expected to have useful life of 6 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $20,000 and $85,000, respectively. Carper has an 8% cost of capital rate, which is the required rate of return on the investment. Instructions (Round to two decimals.) a. Compute (1) the cash payback period and (2) the annual rate of return on the proposed capital expenditure. b. Using the discounted cash flow technique, compute the net present value. c. Carper was presented with a second capital investment that provided similar production facilities as the first one. This investment cost $400,000, had a useful life of 7 years with a salvage value of $15,000. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $25,000 and $80,000 respectively. Carper's 8% cost of capital is also the required rate of return on the investment.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

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Carper Company is considering a capital investment of $390,000 in additional
productive facilities. The new machinery is expected to have useful life of 6
years with no salvage value. Depreciation is by the straight-line method.
During the life of the investment, annual net income and net annual cash
flows are expected to be $20,000 and $85,000, respectively. Carper has an
8% cost of capital rate, which is the required rate of return on the investment.
Instructions (Round to two decimals.)
a. Compute (1) the cash payback period and (2) the annual rate of return
on the proposed capital expenditure.
b. Using the discounted cash flow technique, compute the net present
value.
c. Carper was presented with a second capital investment that provided
similar production facilities as the first one. This investment cost
$400,000, had a useful life of 7 years with a salvage value of $15,000:
Depreciation is by the straight-line method. During the life of the
investment, annual net income and net annual cash flows are
expected to be $25,000 and $80,000 respectively. Carper's 8% cost
of capital is also the required rate of return on the investment.
1. Compute the cash payback period.
2. Compute the annual rate of return.
3. Using the discounted cash flow technique; compute the
net present value.

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Step 3 a) 2. Computation of Annual rate of return on the proposed capital expenditure

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Step 5 b) Computation of net present value

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Step 7 c) 1) Computation of cash payback period

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Step 8 C) 2. Computation of Annual rate of return on the proposed capital expenditure

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