ACCTG 231 Comprehensive Problem #4 To receive credit you need to show work. For NPV and IRR, use discount factors from tables in APP 12-B rather than results from a financial calculator to demonstrate your understanding of cash flows and table factors. Gallatin, Inc., has assembled the estimates shown below relating to a proposed new investment project. The project will last 5 years and requires Gallatin to purchase a machine with a cost of $335,200, a 5-year life and no salvage value. $ Annual cash sales Annual out-of-pocket cash expenses Annual depreciation on equipment Initial cost of equipment 350,000 250,000 67,040 335,200 $ Compute the payback period for the investment (2 points) Compute the investment's approximate IRR (2 points). Compute the investment's simple rate of return (2 points). Gallatin, Inc., has assembled the estimates shown below relating to a proposed new project with a 5-year project life. At the end of the 5 years, the equipment purchased for the project would be sold and working capital would revert to other uses in the company. Gallatin uses a discount rate of 10%. (Ignore income taxes.) Annual cash sales Annual out-of-pocket cash expenses Annual depreciation on new equipment Initial cost of new equipment Salvage value of new equipment in 5 years Working capital requirement $ 450,000 $ 340,000 $ 66,000 $ 380,000 $ 50,000 $ 40,000 Compute the net present value of the project. (4 points) Gallatin is using net present value to evaluate two investments, but only has the capital to fund one. The net present values of the investments are similar but the initial investments required are different, as shown below. Investment 1 Investment 2 Initial investment $125,000 $80,000 Net present value $ 22,000 $20,000 Compute the profitability index for each investment (2 points)