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Iverson Company: Straight-Line Depreciation

Iverson Company is considering the purchase of a new machine. It will cost $270,000, last for 8 years, and have a zero terminal salvage value at the end of that time. If purchased, the machine is expected to increase revenues by $250,000 per year, but additional cash outlays to operate the machine will equal $200,000 per year.

Use straight-line depreciation and ignore income taxes.

a. Net present value if the minimum desired rate of return is 10%

b. Payback period

c. Accounting rate of return using initial investment

Solution Preview

See the attached file for proper formatting.

Cost of new Equipment $270,000.00
First year sales $250,000.00
Annual Increase in sales 0%
Operating expenses-First Year $200,000
Annual Increase in Expenses 0%
Salvage Value 0
Life of plant 8 years
Required rate of return 10%
Tax Rate 0%

Cash Flow ...

Solution Summary

The net present value, payback period, and accounting rate of return is calculated for Iverson Company.