PA11-3 Comparing, Prioritizing Multiple Projects [LO 11-1, 11-2, 11-3, 11-6]

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.

Project 1: Retooling Manufacturing FacilityThis project would require an initial investment of $5,700,000. It would generate $1,018,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,204,000.

Project 2: Purchase Patent for New ProductThe patent would cost $3,995,000, which would be fully amortized over five years. Production of this product would generate $838,950 additional annual net income for Hearne.

Project 3: Purchase a New Fleet of Delivery TrucksHearne could purchase 25 new delivery trucks at a cost of $200,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $6,700. Purchasing the fleet would allow Hearne to expand its customer territory resulting in $1,050,000 of additional net income per year.

Required:1.Determine each project's accounting rate of return.(Round your answers to 2 decimal places.)

2.Determine each project's payback period.(Round your answers to 2 decimal places.)

3.Using a discount rate of 10 percent, calculate the net present value of each project. (Future Value of $1,Present Value of $1,Future Value Annuity of $1,Present Value Annuityof $1.)(Use appropriate factor(s) from the tables provided.Round your intermediate calculations to 4 decimal places and final answers to2 decimal places.)

4.Determine the profitability index of each project and prioritize the projects for Hearne.(Round your intermediate calculations to 2 decimal places. Round your final answers to 4 decimal places.)

value: 10.0!) points PA11e-3 Comparing. Prioritizing Multiple Projects [LO 11-4, 11-2, 113. 11-6] Heame Company has a number of potential capital investments. Because these projects vary in nature. initial investment. and time horizon, management is nding it difcult to compare them. Assume straight line depreciation method is used. Project 1: Retoollng Manufacturing Facility This project would require an initial investrnentof $5.?00,00[I. it would generate $1,013,000 in addilional net cash ow each year. The new machinery has a useful life of eight years and a salvage value of $1,204.5. Project 2: Purchase Patent for New Product The patent would cost $3,995,000, which would be fully amortized over ve years. Production of this product would generate $835,950 additional annual net income for Heame. Project 3: Purchase a New Fleet of Delivery Trucks Heame could purchase 25 new delivery tmcits at a cost of 52130300 each. The Heat would have a useful life of 1D yearsI and each truck wmld have a salvage value of $6300. Purchasing the fleet would allow Heame to expand its customer ten-itory resulting in $1,D50, of additional net income per year. Required: 1. Determine each project's accounting rate of retum. {Round your answers to 2 decimal places.) E Project 1 \"iii: | E Project 2 "to | Project 3 \"to | 2. Determine each project's payback period. {Round your answers to 2 decimal place\" E Project 1 _ EYears I E Project 2 EYears I EProjectE iYears I 3. Using a discount rate cf 10 percent, calculate the net present value of each preject. {Future Value of $1. Present Value of $1, Future Value Annuity of $1. Present Value litnnuitg.I of $1.} [Use appropriate factor{al from the tables provided. Round your intermediate calculations to 4 decimal places and nal answer: to 2 decimal places.} 4. Determine the protability index of each preject and pricritize the projects for Hearne. {Round your interrnediata calculations to 2 decimal places. Round your nal answers to 4 decimal places.}