Morgan Company is considering a capital investment of $210,000 in additional productive facilities. The new machinery is

Question:

Morgan Company is considering a capital investment of $210,000 in additional productive facilities. The new machinery is expected to have a useful life of five 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 $60,000, respectively. Morgan has a 12% cost of capital rate, which is also the minimum acceptable rate of return on the investment.

Instructions

(a) Calculate

(1) The cash payback period.

(2) The annual rate of return on the proposed capital expenditure.

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

Net Present Value
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