Busy Beaver Corp: Accounting Rate of Return, Payback, and NPV

Accounting rate of return, payback, and NPV

Busy Beaver Corp. is interested in reviewing its methods of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $50,000 investment in a machine that had 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.

B) Calculate the payback period for this investment. Based on this analysis, would the investment be made ? Explain your answer.

C) Calculate the net present value of this investment using a cost of capital of 16%. Based on this analysis ,would the investment be made? Explain your answer.

D) What recommendation would you make to the management of Busy Beaver Corp. about evaluating capital expenditure proposals? Support your recommendation with the appropriate rationale.

BusyBeaver Corp. is interested in reviewing its method of evaluating capital expenditure proposals using the accountingrate of return method. A recent proposal involved a $ 50,000 investment in a machine that had an estimated useful life of five years and an estimated salvage value of $ 10,000. The machine was expected to incr

Sea Cable Industries is a company involved in the manufacture of marine cables. The company is planning a move into land lines to exploit new telecommunications opportunities. This will involve the acquisition of new equipment. Two machines have been identified and the returns involved in purchasing each are as follow:

Please provide the solution to the following problem in an Excel spreadsheet.
Turnbull Corp. is in the process of constructing a new plant at a cost of $30 million. It expects the project to generate cash flows of zero in the first year and $1,000,000, $3,000,000, $8,000,000, $18,000,000 and $20,000,000 over years two, three

Suppose a risk less project requires an initial investment of $10 and will generate a one-time cash inflow of $30 two years later. Assuming a risk-free interest rate of 5%, which of the following statements about the project is FALSE?
1. The net present value of the project is positive
2. The IRR is greater then 50 percent
3.

1) Thompson corp has proposed project with normal cash flows. In other words, there is an up-front cost followed over time by a series of positive cash flows. The projects internal rate of return is 12 percent and its WACC is 10 percent. Which of the following statements is most correct?
a. The projects NPV is positive

Three Rivers Company runs clothing stores in the Pittsburgh area. Three Rivers' management estimates that if it invests $250,000 in a new computer system, it can save $75,000 in annual cash operating costs. The system has an expected useful life of ten years and no terminal disposal value. The required rate of return is 8%. I

Pack & Carry is debating whether to invest in new equipment to manufacture a line of high-quality
luggage. The new equipment would cost $1,728,125, with an estimated five-year life and no salvage
value. The estimated annual operating results with the new equipment are as follows:
Revenue from sales of new luggage . . . . .

1. The budget committee has received the following projects. They are mutually exclusive. The Company uses 10% as the rate of return.
Year Project A Project B
0 - 30,000 - 60,000
1 10,000 20,000
2 10,000 20,000
3 10,000 20,000
4 10,000 20,000
5 10,0

An investment of $83 generates after-tax cash flows of $50.00 in Year 1, $70.00 in Year 2, and $133.00 in Year 3. The required rate of return is 20 percent. The net present value is
Mavis, Inc., is evaluating a project. The company uses a 13.8 percent discount rate for this project. Cost and cash flows are shown in the table.