| Kolev, LLC is debating whether to invest in new equipment to manufacture a line of high quality luggage. The new equipment would cost $900,000, with an estimated four year life and no salvage value. The estimated annual operating results with the new equipment are as follows: |
| Revenue from sales of new luggage | $ | 959,000 | ||||
| Expenses other than depreciation | $ | 675,000 | ||||
| Depreciation (straight line basis) | 225,000 | (900,000 | ) | |||
| | | | | | ||
| Increase in net income from the new line | $ | 59,000 | ||||
| | | | ||||
| | ||||||
| All revenue from the new luggage line and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes. |
| a. | Compute the annual cash flows for the investment in the new equipment to produce the new luggage line to produce the new luggage line. (Omit the “$” sign in your response.) |
| Annual cash flows | $ |
| b. | Compute the payback period for the investment in the new equipment to produce the new luggage line.(Round your answer to the nearest whole number.) |
| Payback period | years |
| c. | Compute the return on average investment for the investment in the new equipment to produce the new luggage line. (Round your answer to 2 decimal places. Omit the “%” sign in your response.) |
| Return on average investment | % |
| d. | Compute the total present value of the expected future annual cash inflows, discounted at an annual rate of 10 percent for the investment in the new equipment to produce the new luggage line. (Use Exhibit 26 4.) (Round your “PV factor” to 3 decimal places. Omit the “$” sign in your response.) |
| Total present value | $ |
| e. | Compute the net present value of the proposed investment discounted at 10 percent for the investment in the new equipment to produce the new luggage line. (Use Exhibit 26 4.) (Round your “PV factor” to 3 decimal places. Omit the “$” sign in your response.) |
| Net present value | $ |
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