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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:
- Calculate the ARR, payback period, and NPV.
- Evaluate the investment's financial feasibility.
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