Rondello Company is considering a capital investment of $150,000 in additional productive facilities. The new machinery is

Question:

Rondello Company is considering a capital investment of $150,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $18,000 and $48,000, respectively. Rondello has a 12% cost of capital rate, which is the minimum acceptable rate of return on the investment.


Instructions

(Round to two decimals.)

(a) Compute

(1) The annual rate of return and

(2) The cash payback period on the proposed capital expenditure.

(b) Using the discounted cash flow technique, compute the net present value.


Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Discounted Cash Flows
What is Discounted Cash Flows? Discounted Cash Flows is a valuation technique used by investors and financial experts for the purpose of interpreting the performance of an underlying assets or investment. It uses a discount rate that is most...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
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