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    Payback Period, Accounting Rate of Return, and NPV

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    Elite Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $ 300,000 cost with an expected four- year life and a $20,000 salvage value. All sales are for cash, and all costs are out of pocket except for depreciation on the new machine. Additional information includes the following.

    Expected annual sales of new product . . . . . . . . . . . . . . . . . . . . . . $ 1,150,000
    Expected annual costs of new product
    Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000
    Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420,000
    Overhead excluding straight- line depreciation on new machine . . . . . . 210,000
    Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000
    Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30%

    Required:

    1. Compute straight- line depreciation for each year of this new machine's life. (Round depreciation amounts to the nearest dollar.)

    2. Determine expected net income and net cash flow for each year of this machine's life. (Round answers to the nearest dollar.)

    3. Compute this machine's payback period, assuming that cash flows occur evenly throughout each year. (Round the payback period to two decimals.)

    4. Compute this machine's accounting rate of return, assuming that income is earned evenly throughout each year. (Round the percentage return to two decimals.)

    5. Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year- end. (Hint: Salvage value is a cash inflow at the end of the asset's life. Round the net present value to the nearest dollar.)

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    https://brainmass.com/business/net-present-value/418550

    Solution Summary

    This solution illustrates how to compute a project's payback period, accounting rate of return, and net present value in the Excel sheet attached.

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