Problem #2 (40 Points)

Hillman Inc. is considering a proposal to invest $210,000 in new production equipment which will be depreciated on a straight-line basis (7-year life, no salvage value).Depreciation expense is included in Manufacturing costs. The projected annual revenues and costs of the new product that will be produced from the equipment are:

Sales$236,000

Less costs and expenses:

Manufacturing costs$145,000

Selling and administrative55,000200,000

Income before income taxes36,000

Income tax expense 18,000

Net income$18,000

Present Value of an Annuity of $1.00 Table

Periods (n)

8%

9%

10%

11%

12%

15%

18%

20%

24%

3

2.5771

2.5313

2.4869

2.4437

2.4018

2.2832

2.1743

2.1065

1.9813

4

3.3121

3.2397

3.1699

3.1025

3.0374

2.8550

2.6901

2.5887

2.4043

5

3.9927

3.8897

3.7908

3.6959

3.6048

3.3522

3.1272

2.9906

2.7454

6

4.6229

4.4859

4.3553

4.2305

4.1114

3.7845

3.4976

3.3255

3.0205

7

5.2064

5.0330

4.8684

4.7122

4.5638

4.1604

3.8115

3.6046

3.2423

8

5.7466

5.5348

5.3349

5.1461

4.9676

4.4873

4.0776

3.8372

3.4212

9

6.2469

5.9953

5.7590

5.5371

5.3283

4.7716

4.3030

4.0310

3.5655

(a)Compute the annual rate of return.

(b)Compute the cash payback period.

(c)Compute the net present value assuming a 10% required rate of return.

(d)Determine the estimated internal rate of return.

(e)Should HIllman Inc. invest in the new production equipment? Why or why not?