Chapter 10 P4. Capital Investment Decision: Comprehensive

Edge Companys Production vice president believes keeping up-to-date with technological changes is what makes the company successful and feels that a machine introduced recently would fill an important need. The machine has an estimated useful life of four years, a purchase price of $250,000 and a residual value of $25,000. The company controller has estimated average annual net income of $11,250 and the following cash flows for the new machines:

Cash flow Estimates

Year Cash inflows Cash outflows Net cash Inflows

1325,000 250,000 75,000

2320,000 250,000 70,000

3315,000 250,000 65,000

4310,000 250,000 60,000

The company uses a 12% minimum rate of return and a three-year payback period for capital investment evaluation processes.

Required:

1. Analyze the data about the machine. Use the following evaluation approaches in your analysis.

a. Net present value method (round to the nearest dollar).

b. Accounting rate of return method (round percentage to one decimal place).

c. Payback period method (round to one decimal place).

Hint: Use Tables 1 and 2 in Appendix A.