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 straight line
depreciation method is used.
Project 1: Retooling
Manufacturing Facility
This 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 Product
The 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 Trucks
Hearne 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.