Harmony Company has a number of potential capital investments. Because these projects vary in nature, initial investment, and time horizon, Harmony’s management is finding it difficult to compare them.
Project 1: Retooling Manufacturing Facility
This project would require an initial investment of $2,700,000. It would generate $975,000 in additional cash flow each year. The new machinery has a useful life of seven years and a salvage value of $600,000.
Project 2: Purchase Patent for New Product
The patent would cost $8,200,000, which would be fully amortized over 10 years. Production of this product would generate $1,650,000 additional annual net income for Harmony.
Project 3: Purchase a New Fleet of Delivery Vans
Harmony could purchase 10 new delivery vans at a cost of $25,000 each. The fleet would have a useful life of 10 years, and each van would have a salvage value of $2,500. Purchasing the fleet would allow Harmony to expand its delivery area resulting in $30,000 of additional net income per year.

1. Determine each project’s accounting rate of return and compare the projects.
2. Determine each project’s payback period and compare the projects.
3. Using a discount rate of 10 percent, calculate the net present value of each project.
4. Determine the profitability index of each project and prioritize the projects for Harmony.

  • CreatedFebruary 27, 2015
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