Net Present Value Analysis Anderson Company must evaluate tw

Net Present Value Analysis Anderson Company must evaluate two capital expenditure proposals. Anderson\'s hurdle rate is 12%. Data for the two proposals follow. Proposal X Proposal Y $360,000 $360,000 Required investment Annual after-tax cash inflows After-tax cash inflows at the end of years 3, 6, 9, and 12 Life of project 188,000 2 years 12 years What is the cash payback period for Proposal X? For Proposal Y? Hint: For Proposal Y, in what year (3, 6,9 or 12) will the full original investment be recovered? Round Proposal X answer to one decimal place, if applicable. Proposal X years Proposal Y years

Solution

Cash payback period = Initial investment/Annual cash flow

Proposal X = 360000/80400 = 4.5 years

Proposal Y = 6 Yearss

Calculate average rate of return on investment :

Average investment = 140000/2 = 70000

Average rate of return on investment = 7150*100/70000 = 10%

Increase in revenue	35000
Increase in expense (10000+14000)	24000
Pretax income from investment	11000
Income tax expense	3850
Net income from investment	7150