Sommers Company Is Evaluating a Project Requiring a Capital Expenditure

question 6

Essay

Sommers Company is evaluating a project requiring a capital expenditure of $300,000.The project has an estimated life of 5 years and no salvage value.The estimated net income and net cash flow from the project are as follows:
​ $$\begin{array} { c r r } \text { Year } & \text { Net Income } & \text { Net Cash Flow } \\1 & \$ 60,000 & \$ 120,000 \\2 & 50,000 & 110,000 \\3 & 45,000 & 105,000 \\4 & 30,000 & 90,000 \\5 & 20,000 & 80,000 \\& \mathbf { \$ 2 0 5 , 0 0 0 } & \mathbf { \$ 5 0 5 , 0 0 0 }\end{array}$$ ​
The company's minimum desired rate of return for net present value analysis is 12%.The present value of $1 at compound interest of 12% is shown in the table below:
​ $$\begin{array} { | c | c | } \hline \text { Year } & \begin{array} { c } \text { Present Value } \\\text { of } \$ 1 \text { at } 12 \%\end{array} \\\hline 1 & 0.893 \\\hline 2 & 0.797 \\\hline 3 & 0.712 \\\hline 4 & 0.636 \\\hline 5 & 0.567 \\\hline\end{array}$$ ​
Determine (a) the average rate of return on investment, giving effect to depreciation on the investment, and (b) the net present value.

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Definitions:

Specific Vision

A clear and precise idea or goal towards which efforts are directed, often guiding decision-making and strategy.

Future

The time or period that comes after the present, characterized by events that have yet to occur or developments that are to be realized.

Flexible Budget

A budget that adjusts or flexes with changes in volume or activity levels, allowing for better management and control of finances under varying circumstances.

Demand Season

A time period characterized by a significant increase in the demand for certain products or services.