Cash Payback Period, Net Present Value Analysis, and Qualitative considerations The plant manager of Shenzhen Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost $216,000. The manager believes that the new investment will result in direct labor savings of $72,000 per year for 10 years. Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.893 0.870 0.833 2 0.909 1.736 2.487 1.833 2.673 1.528 1.690 2.402 1.626 2.283 3 2.106 4 3.465 3.037 2.589 2.855 3.353 5 4.212 3.605 2.991 3.170 3.791 4.355 4.868 6 4.917 3.785 4.111 4.564 3.326 3.605 7 5.582 4.160 8 6.210 5.335 4.968 4.487 3.837 9 5.328 4.772 4.031 6.802 7.360 5.759 6.145 10 5.650 5.019 4.192 a. What is the payback period on this project? 3 years b. What is the net present value, assuming a 12% rate of return? Use the table provided above. Round to the nearest whole dollar. Net present value c. What else should the manager consider in the analysis? Feedback Average Rate of Return Method, Net Present Value Method, and Analysis for a service company The capital investment committee of Arches Landscaping Company is considering two capital investments. The estimated operating income and net cash flows from each investment are as follows: Front-End Loader Greenhouse Operating Net Cash Operating Net Cash Year Flow Income Flow 1 $60,900 $183,000 $120,000 $293.000 189,000 97,000 247,000 60,900 163,000 174,000 60,900 163,000 21,000 119,000 60,900 163.000 82.000 5304,500 5304,500 $915.000 2 3 Each project requires an investment of $580,000. Straight-line depreciation will be used, and no residual value is expected. The committee has selected a rate of 12% for purposes of the net present value analysis. Present Value of $1 at Compound Interest Year 1 2 0.943 0.9090.893 0.890 0.826 0.797 0.751 0.712 0.792 0.683 0.636 4 5 6 7 204 0.870 0.833 0.756 0.694 0.658 0.579 0.572 0.482 0.402 0.432 0.335 0.376 0.279 0.327 0.254 0.194 0.247 0.162 0.705 0.665 0.564 0.513 0.467 0424 0.502 0452 0.404 0.361 0.322 10 0.386 0.592 0.558 Required: 1a. Compute the average rate of return for each investment. If required, round your answer to one decimal place. Average Rate of Return Front-End Loader Greenhouse 1b. Compute the net present value for each investment. Use the present value of $1 table above. If required, round to the nearest dollar. If required, use the minus sign to indicate a negative net present value. Front-End Loader Greenhouse Present value of net cash flow Amount to be invested Net present we 2. Prepare a brief report for the capital investment committee, advising it on the relative merits of the two investments. $2,055,600. No residual value is expected from either project. Present Value of an Annuity of $1 at Compound Interest 104 0.943 0.909 0.870 0.833 124 2 1.833 1.626 3 4 3.465 3.037 7 436 5.335 5.759 2.106 2.589 3.791 3.326 4.561 6.210 9 6.802 5.328 4.772 10 5.019 Required: 1a. Compute the net present value for each project. Use a rate of 10% and the present value of an annuity of $1 in the table above. If required, use the minus sign to indicate a negative net present value. If required, round to the nearest whole dollar Wind Turbines Biofuel Equipment Present value of annual net cash flows Less amount to be invested Net present value 1b. Compute a present value index for each project. If required, round your answers to two decimal places. Present Value Index Wind Turbines Biofuel Equipment 2. Determine the internal rate of return for each project by (a) computing a present value factor for an annuity of $1 and (b) using the present value of an annuity of $1 in the table above. If required, round your present value factor answers to three decimal places and internal rate of return to the nearest whole percent. Wind Turbines Biofuel Equipment Present value factor for an annuity of $1 Internal rate of return 3. The net present value, present value index, and internal rate of return all indicate that the is/are a better financial opportunity compared to the although both investments meet the minimum return criterion of 10%