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Capital Budgeting for Ernest Corporation

Ernest Corporation is debating whether to purchase a new computerized production system. The system will cost $450,000 and have an estimated 10 year life with a salvage value of $70,000. The estimated operating results from the new production system are as follows:

incremental revenue $180,000
incremental expenses:
expenses other than depreciation $85,000
depreciation (straight line basis) $38,000 $-123,000
incremental net income $ 57,000

All revenues and expenses, other than depreciation, will be received and paid in cash.

Please compute the following for this proposal:

a-Annual net cash flow $
b-Payback period: _____________years
c-Return on average investment:_____________%
d-Net present value discounted at an annual rate of 6% (present value of $1 due in 10 years, discounted at 6%, is 0.558, and present value of $1 received annually for 10 years, discounted at 6%, is 7.360): $__________________.

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a-Annual net cash flow ...

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The solution discusses capital budgeting for Ernest Corporation.