LO 11-1, 11-2, 11-3, 11-6 PA11-3 Comparing, Prioritizing Multiple Projects 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. CHAPTER 11 Capital Budgeting Project 1: Retooling Manufacturing Facility This project would require an initial investment of $4,850,000. It would generate $865,000 in addi- tional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,000,000. Project 2: Purchase Patent for New Product The patent would cost $3,400,000, which would be fully amortized over five years. Production of this product would generate $425,000 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 $115,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $5,000. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $200,000 of additional net income per year. Required: 1. Determine each project's accounting rate of return. 2. Determine each project's payback period. 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 Hearne