Moosehead Community Centre, a not for profit organization not subject to income taxes, is considering the purchase

Question:

Moosehead Community Centre, a not for profit organization not subject to income taxes, is considering the purchase of a new snowplow costing $20,000. The estimated useful life is eight years, with no salvage value. Moosehead's minimum expected return is 12%, and it has a four-year cut-off guideline when evaluating an investment project. Moosehead uses straight-line amortization. The manager estimates the following savings in cash operating costs:
Year ...........................Amount
1 ................................$ 5,200
2 ..................................4,800
3 ..................................4,400
4 ..................................3,600
5 ..................................3,200
6 ..................................2,800
7 ..................................2,200
8 ..................................1,800
Total ...........................$28,000
REQUIRED
A. What is the net present value of this investment?
B. What is the accrual accounting rate of return based on the initial investment? Use the average annual savings when computing the numerator.
C. What is the payback period?
D. Based on the financial evaluation, would you recommend the investment?
Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...
Fantastic news! We've Found the answer you've been seeking!

Step by Step Answer:

Related Book For  book-img-for-question

Cost Management Measuring Monitoring And Motivating Performance

ISBN: 9781118168875

2nd Canadian Edition

Authors: Leslie G. Eldenburg, Susan Wolcott, Liang Hsuan Chen, Gail Cook

Question Posted: