Background Information: Rosie owns and operates Sunshine Berries, which sells a variety of berries and other summer fruits. Rosies berry and fruit stock availability is limited by her current shop floor space and she has been exploring a new walk-in refrigerator that will let her increase the number of berries and fruit that she is able to stock. Rosies aunty frequently advises her on business matters but is not convinced that the new refrigerator will be more efficient and profitable than her current one. She has suggested using capital budgeting to help with the investment decision.

The new refrigerator requires a capital outlay of $20,000 and will have a residual value of $4,500 at the end of its five year useful life. It is expected that the new refrigerator will generate the following

Net Cash Inflow: Year Net Cash Inflow

1 $6,900

2 6,500

3 3,750

4 3,750

5 3,750

Rosie uses straight-line depreciation on all machinery and equipment. Rosie requires a minimum 15 per cent accounting rate of return and a three year payback period for any investment project. Rosies cost of capital is 14 per cent.

1. Identify, using examples, TWO (2) specific risks associated with investment in the proposed new refrigerator AND explain how these risks could impact the business

2. Calculate the annual depreciation expense for the proposed new refrigerator

3.

a) Calculate the average accounting rate of return (ARR) of the proposed new refrigerator.

b) Given your answer above (calculate ARR), should Rosie invest in the proposed new refrigerator? Explain your answer.