Net present value method: Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method. To calculate: The net present value of the investment.

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5 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. (Use Exhibit 26-4.) oints Revenue from sales of industrial distilling vats Expenses other than depreciation eBook Hint Depreciation (straight-line basis) Increase in net income from industrial distilling vats $995,000 $675,000 225,000 900,000 $ 95,000 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. Required: Print 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. Note: Round your answer to 1 decimal place. c. Compute the return on average investment for Ferrent's…

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Question

Chapter 25, Problem 25.3BE

(1)

To determine

Net present value method:

Net present value method is the method which is used to compare the initial cash outflow of investment with the present value of its cash inflows. In the net present value, the interest rate is desired by the business based on the net income from the investment, and it is also called as the discounted cash flow method.

To calculate: The net present value of the investment.

(2)

To determine

Present value index:

Present value index is a technique, which is used to rank the proposals of the business. It is used by the management when the business has more investment proposals, and limited fund.

The present value index is computed as follows:

Present value index =Total present value of net cash flowAmount to be invested

To calculate: The present value index of the investment.

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5 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. (Use Exhibit 26-4.) oints Revenue from sales of industrial distilling vats Expenses other than depreciation eBook Hint Depreciation (straight-line basis) Increase in net income from industrial distilling vats $995,000 $675,000 225,000 900,000 $ 95,000 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. Required: Print 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. Note: Round your answer to 1 decimal place. c. Compute the return on average investment for Ferrent's…

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