(LO 1, 2, 5) Cornfield Company is considering a long-term capital investment project in laser equipment. This will require an investment of $280,000, and it will have a useful life of 5 years. Annual net income is expected to be $16,000 a year. Depreciation is computed by the straight-line method with no salvage value. The company’s cost of capital is 10%, and it desires a cash payback of 60% of a project’s useful life or less. (Hint: Assume cash flows can be computed by adding back depreciation expense.)
Instructions
(Round all computations to two decimal places unless directed otherwise.)
a. Compute the cash payback period for the project.
b. Compute the net present value for the project. (Round to nearest dollar.)
c. Compute the annual rate of return for the project.
d. Should the project be accepted? Why?
Compute annual rate of return, cash payback, and net present value.
