Directors of Holland Ltd are considering the purchase of a new machine

The machine will cost $210 000

There will be net cash inflows in each of the three yearsof:

Year 1: $80 000, Year 2:$90 000 and Year :3 $69 000

The machine is thought to have a residual value of $40 000 at the end of year 3

The required rate of return (RRR) is 12%

Discount Rate (r)

Period

6%

8%

10%

12%

14%

16%

18%

20%

0

1.000

1.000

1.000

1.000

1.000

1.000

1.000

1.000

1

0.943

0.926

0.909

0.893

0.877

0.862

0.847

0.833

2

0.890

0.857

0.826

0.797

0.769

0.743

0.718

0.694

3

0.840

0.794

0.751

0.712

0.675

0.641

0.609

0.579

4

0.792

0.735

0.683

0.636

0.592

0.562

0.516

0.482

Calculatethe Accounting Rate of Return (ARR)

Showeachof the 5 steps of your calculations andstate the decision rule.

1

2

3

4

5

Decision rule:

Calculatethe total Payback period (PP) including the balance foreachyear

andstate the decision rule.

Decision rule:

Calculatethe Net present value (NPV) using the RRR provided andstate the decision rule.

Year

Discount rate

$ Cash inflow

$ NPV

Decision rule: