Accounting rate of return, payback, and NPV
Not what you're looking for?
Accounting rate of return, payback, and NPV.
ABC Corp. is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $50,000 investment in a machine that an estimated useful life of five years and an estimated salvage value of $10,000. The machine was expected to increase net income (and cash flows) before depreciation expense by $15,000 per year. The criteria for approving a new investment are that it have a rate of return of 16% and a paycheck period of three years or less.
Required:
a) Calculate the accounting rate of return on this investment for the first year. Assume straight-line depreciation. Based on this analysis, would the investment be made? Explain your answer.
b) Calculate the payback period for this investment. Based on this analysis, would the investment be made? Explain the answer.
c) Calculate the net present value of this investment using a cost of capital of 16%. Based on the analysis, would the investment be made? Explain your answer.
d) What recommendation would you make to management of ABC Corp. about evaluating capital expenditure proposals? Support your recommendation with the appropriate rationale.
Purchase this Solution
Solution Summary
The solution calculates accounting rate of return, payback, and NPV of capital expenditure proposals.
Solution Preview
Accounting rate of return, payback, and NPV. ABC Corp. is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $50,000 investment in a machine that an estimated useful life of five years and an estimated salvage value of $10,000. The machine was expected to increase net income (and cash flows) before depreciation expense by $15,000 per year. The criteria for approving a new investment are that it have a rate of return of 16% and a payback period of three years or less.
Machine:
Investment= $50,000
Salvage Value= $10,000
Amount to be depreciated= $40,000 =$50,000. - $10,000.
Useful life= 5 years
Therefore, annual depreciation= $8,000 =$40,000. / 5
Cash flows
Year Cash flow
0 -$50,000 (initial investment)
1 $15,000
2 $15,000
3 $15,000
4 $15,000
5 $25,000 Net ...
Purchase this Solution
Free BrainMass Quizzes
Marketing Management Philosophies Quiz
A test on how well a student understands the basic assumptions of marketers on buyers that will form a basis of their marketing strategies.
Team Development Strategies
This quiz will assess your knowledge of team-building processes, learning styles, and leadership methods. Team development is essential to creating and maintaining high performing teams.
Operations Management
This quiz tests a student's knowledge about Operations Management
Change and Resistance within Organizations
This quiz intended to help students understand change and resistance in organizations
Introduction to Finance
This quiz test introductory finance topics.