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 the straight-line depreciation method is used.
Project 1: Retooling Manufacturing FacilityThis project would require an initial investment of $5,800,000. It would generate $1,036,000 in additional net cash flow each year. The new machinery has a useful life of eight years and a salvage value of $1,228,000.
Project 2: Purchase Patent for New ProductThe patent would cost $4,065,000, which would be fully amortized over five years. Production of this product would generate $894,300 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 $210,000 each. The fleet would have a useful life of 10 years, and each truck would have a salvage value of $6,900.
Purchasing the fleet would allow Hearne to expand its customer territory resulting in $1,155,000 of additional net income per year.
a. Determine each project's accounting rate of return. (Round your answers to 2 decimal places.)
b. Determine each project's payback period. (Round your answers to 2 decimal places.)
c. 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 Annuity of $1.) (Use appropriate factor(s) from the tables provided. Round your final answers to 2 decimal places.)
d. 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.)