PB11-3 Comparing, Prioritizing Multiple Projects LO 11-1, 11-2, 11-3, 11-6

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 I: 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.

there is no more required information.

A1 22 Accounting Rate of Return = Project 3: 26 Accounting Rate of Return = \begin{tabular}{l|r} 27 & \\ 28 & \\ 29 \\ \cline { 3 } 30 & \\ 31 & Payb \\ 32 & \\ 33 & Project 1: \\ & \end{tabular} 34 payback period 35 Ranking Net Present Value 57 pV of Cost to Rebuild 58 PV of Salvage Value 59 Present Value of Cash Flows 62 Net Present Value 63 Project 2: 66 pV of Annual Cash Flows 67 PV of cost to Rebuild 68 PV of Salvage Value 6970PresentValueofCashFlows 71 Initital investment 72. Net Present Value 73 Proiect 3: \begin{tabular}{l} 73 Proiect 3: \\ Blank \\ \hline \end{tabular} Ready Z Accessibility: investigate File Home insert Draw Page Layout Formulas Data Review View Help 91. pvof future cash flows 92. Initial investment