Pack & Carry is debating whether to invest in new equipmentto manufacture a line of high-quality luggage.
The new equipment would cost $1,728,125, with an estimatedfive-year life and no salvage value.
The estimated annual operating results with the new equipmentare as follows:
Revenue from sales of new luggage . . . . . . . . . . . . . . .. . . . . . . . . . $800,000
Expenses other than depreciation . . . . . . . . . . . . . . . .. . . . . $306,250
Depreciation (straight-line basis) . . . . . . . . . . . . . . .. . . . . . 345,625 651,875
Increase in net income from the new line . . . . . . . . . . . .. . . $148,125
All revenue from the new luggage line and all expenses (exceptdepreciation) will be received or paid in cash in the same periodas recognized for accounting purposes. You are to computethe following for the investment in the new equipment to producethe new luggage line:
a. Annual cash flows.
b. Payback period.
c. Return on average investment.
d. Total present value of the expectedfuture annual cash inflows, discounted at an annual rate of 10percent.
e. Net present value of the proposedinvestment discounted at 10 percent.
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