Question

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.

Required:
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.



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  • CreatedFebruary 27, 2015
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