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 timehorizon, management is finding it difficult to compare them. Assumestraight line depreciation method is used.   

Project 1: Retooling Manufacturing Facility

This project would require an initial investment of $5,500,000. Itwould generate $982,000 in additional net cash flow each year. Thenew machinery has a useful life of eight years and a salvage valueof $1,156,000.

Project 2: Purchase Patent for New Product

The patent would cost $3,855,000, which would be fully amortizedover five years. Production of this product would generate $732,450additional annual net income for Hearne.

Project 3: Purchase a New Fleet of DeliveryTrucks

Hearne could purchase 25 new delivery trucks at a cost of $180,000each. The fleet would have a useful life of 10 years, and eachtruck would have a salvage value of $6,300. Purchasing the fleetwould allow Hearne to expand its customer territory resulting in$855,000 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, calculatethe net present value of each project. (Future Value of $1, PresentValue of $1, Future Value Annuity of $1, Present Value Annuity of$1.) (Use appropriate factor(s) from the tablesprovided. Round your intermediate calculations to4 decimal places and final answers to 2 decimalplaces.)

       

4. Determine the profitability index of eachproject and prioritize the projects for Hearne. (Round yourintermediate calculations to 2 decimal places. Round your finalanswers to 4 decimal places.)