1 Surrey Inc. is considering the purchase of new equipment. Details of the investment follow:

Net initial investment $1,025,000

Estimated Useful life 8 years

Estimated terminal disposal price $120,000

Estimated annual cash sales $520,000

Estimated annual cash operating expenses $295,000

Required rate of return 12%

Depreciation method: straight line

Required:

a. Calculate the payback period.

b. Calculate the accrual accounting rate of return based on the initial investment.

c. Calculate the net present value

2. West Coast Manufacturing Ltd. is considering buying an automated machine that costs $300,000. It requires working capital of $10,000. Annual cash savings are anticipated to be $80,000 for five years. The company uses straight-line depreciation. The salvage value at the end of five years is expected to be $20,000. The working capital will be recovered at the end of the machine's life.

Required:

1. Compute the accrual accounting rate of return based on the initial investment.

2. Compute the internal rate of return

3. We have discussed several investment methods in class, how would rank them in desirability for the company? Explain with characteristics of each method!