Capital Budgeting

We are considering the purchase of a machine that will cost $10,000 and increase profits by $4,000 each year over its 5 year useful life. There is no salvage value on the machine at the end of five years. Depreciation will be $1,000 per year and is not included in the profit listed above. The companys cost of capital is 8%.

1. Calculate the Net Present Value:

1. Calculate the Payback period:

(Hint: Use a table format to keep your answer organized)

1. The company uses straight line depreciation for machines. Calculate the Average Accounting Return:

1. Calculate the Profitability Index:

(HINT: remember you already did most of the calculations when you did the NPV, so you can lift numbers from above)