Respuesta :
Answer:
Hearne Company
                           Project 1     Project 2      Project 3
Initial investment cost         $4,850,000   $3,400,000   $2,875,000
Annual cash inflows             865,000     1,105,000      475,000
PV annuity  (5.335/3.791/6.145)   4,614,775    4,189,055    $2,918,875
Useful life                    8 years       5 years        10 years
Salvage Value                1,000,000    0             125,000
PV (0.467/0/0.386 Â Â Â Â Â Â Â Â Â Â Â Â Â 467,000 Â Â Â 0 Â Â Â Â Â Â Â Â Â Â Â Â Â 48,250
Depreciable/Amortization amount $3,850,000 Â $3,400,000 Â Â $2,750,000
Annual depreciation/amortization 481,250 Â Â Â 680,000 Â Â Â Â Â Â 275,000
Annual Returns                383,750    425,000      200,000
Average annual investment cost 606,250 Â Â Â 680,000 Â Â Â Â Â 287,500
a. Accounting rate of return      63.30%     62.50%       69.57%
b. Payback period            5.61 years   3.08 years       6.05 years
Total PV of cash inflows        5,081,775   4,189,055     2,967,125
c. NPV Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $231,775 Â Â $789,055 Â Â Â Â Â Â $92,125
d. Profitability Index            1.0478      1.2321        1.0320
Prioritization of Projects:
Project 2
Project 1
Project 3
Based on NPV, Profitability Index, and Payback Period.
Explanation:
a) Data and Calculations:
                           Project 1     Project 2      Project 3
Initial investment cost         $4,850,000   $3,400,000   $2,875,000
Annual cash inflows             865,000     1,105,000      475,000
PV annuity  (5.335/3.791/6.145)   4,614,775    4,189,055    $2,918,875
Useful life                    8 years       5 years        10 years
Salvage Value                1,000,000    0             125,000
PV (0.467/0/0.386 Â Â Â Â Â Â Â Â Â Â Â Â Â 467,000 Â Â Â 0 Â Â Â Â Â Â Â Â Â Â Â Â Â 48,250
Depreciable/Amortization amount $3,850,000 Â $3,400,000 Â Â $2,750,000
Annual depreciation/amortization 481,250 Â Â Â 680,000 Â Â Â Â Â Â 275,000
Annual Returns                383,750    425,000      200,000
Average annual investment cost 606,250 Â Â Â 680,000 Â Â Â Â Â 287,500
Accounting rate of return        63.30%     62.50%       69.57%
Payback period              5.61 years   3.08 years       6.05 years
Total PV of cash inflows        5,081,775   4,189,055     2,967,125
NPV Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â $231,775 Â Â $789,055 Â Â Â Â Â Â $92,125
Profitability Index                1.0478      1.2321        1.0320
Key Calculation Formulas:
Annual cash flows = Annual Depreciation Plus Annual Net Income
Present of annual cash flows = Annuity factor * Annual cash flows
PV of Salvage value = Salvage value * Discount Factor
The Depreciable or Amortization amount = Initial investment cost Minus Salvage value
Annual Returns = Annual Cash inflow Minus Depreciation
Average annual investment cost = Initial investment cost/useful life
Accounting rate of return = Â average annual returns/average annual investment cost
Payback period = Initial investment/Annual cash inflows
Total PV of cash flows = PV of annual cash inflows + PV of Salvage value
NPV = Total PV of cash flows Minus Initial Investment Cost
Profitability Index = Total PV of cash flows/Initial Investment Cost