Hearne Company has a number of potential capital investments.

Because these projects vary in nature, initial investment, and time

horizon, management is finding it difficult to compare them. Assume

straight line depreciation method is used. $($Future Value of

$$1,$Present Value of $$1,$Future Value Annuity of

$$1,$Present Value Annuity$$of $$1.)($Use

appropriate factor$($s$)$ from the tables provided.$)$

Project $1$: Retooling Manufacturing Facility

This project would require an initial investment of $$5,010,000.$ It

would generate $$1,009,000$ in additional net cash flow each year.

The new machinery has a useful life of eight years and a salvage

value of $$1,960,000.$

Project $2$: Purchase Patent for New Product

The patent would cost $$3,960,000,$ which would be fully amortized

over five years. Production of this product would generate $$811,800$

additional annual net income for Hearne.

Project $3$: Purchase a New Fleet of Delivery

Trucks

Hearne could purchase $25$ new delivery trucks at a cost of $$175,800$

each. The fleet would have a useful life of $10$ years, and each

truck would have a salvage value of $$6,600.$ Purchasing the fleet

would allow Hearne to expand its customer territory resulting in

$$243,000$ of additional net income per year.

Required:

$1.$Determine each project's accounting rate of

return.PROJECT $1$PROJECT $2$PROJECT $3$

$2.$Determine each project's payback

period.PROJECT $1$PROJECT $2$PROJECT $3$

$3.$Using a discount rate of $10$ percent,

calculate the net present value of each project.PROJECT $1$PROJECT $2$PROJECT $3$

$4.$Determine the profitability index of each

project and prioritize the projects for Hearne.$$

$$Profitability$$index$$

$$ Rank$$PROJECT $1$PROJECT $2$PROJECT $3$