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ABC Corp. is considering purchasing a machine costing $65,000. The useful life of the machine is 4 years and has no residual value. The
ABC Corp. is considering purchasing a machine costing $65,000. The useful life of the machine is 4 years and has no residual value. The physical plant manager estimates that the use of this machine will produce operational cost savings over the next four years, as follows: Year Amount 1 $25,000 2 22,000 3 21,000 4 20,000 Total $88,000 ABC uses a required rate of return to evaluate its investment projects (or capital budget) of 18% capital budget) of 18%. Presume two things: 1) that the effect of taxes can be ignored in the analysis, 2) that all cash flows are generated at the end of the year, and 2) that all cash flows are generated at the end of the year. That all cash flows are generated at the end of the year, except for the initial investment. Required Calculate the following metrics in the case of this investment. 1- Net present value 2- Payback period (Payback period) 3- Internal rate of return using the interpolation method. method) 4- Accounting rate of return. Assume straight-line depreciation. Use the average annual savings in operating costs in the numerator of this computation. (Accrual accounting rate of return based on net initial investment).
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