East Tonregee Company is considering a capital investment of $300,000 in additional Productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net Income and cash inflows are expected to be $27,000 and $87,000 respectively. East Tonregee has a 12% cost of capital rate, which is the minimum acceptable rate of return on the investment.

Required

1). Compute the annual rate of return.

2). Compute the cash payback period on the proposed capital expenditure.
3). Using the discounted cash flow technique, compute the net present value.
4). Is the IRR% greater or lower than the 12% cost of capital?

Answer rating: 100% (QA)

1 Annual rate of return Net Income Average Investment 27000 300000 x 12 18 2 Cash payback ... View the full answer