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IBM is considering a $1,500,000 investment in new technology. The calculations for accounting rate of return, payback, and discounted cash flows are as follows: Year

IBM is considering a $1,500,000 investment in new technology. The calculations for accounting rate of return, payback, and discounted cash flows are as follows:

Year

0

1

2

3

4

5

Initial Investment

$1,500,000






Depreciation @ 15%


$225,000

$225,000

$225,000

$225,000

$225,000

Book Value at Year-End

$1,500,000

$1,275,000

$1,050,000

$825,000

$600,000

$375,000

Cash Flows


$350,000

$400,000

$300,000

$250,000

$200,000

Profit


$125,000

$175,000

$75,000

$25,000

-$25,000

ARR (%)


8.33%

13.33%

7.14%

4.17%

-6.67%

Payback (years)



4.3




NPV @ 10%






$80,000

Requirements:

  1. Calculate the ARR, payback period, and NPV.
  2. Evaluate the investment's financial feasibility.
Provide a recommendation.

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