Pearl insulating Company is considering purchasing a new equipment. It will require an initial investment of $7,000,000. The new project will provide $1,200,000 constant net income each year, over the next four years. The scrap value for new equipment will be $120,000. The expected cash flow for the next 4 years are as follows: Year 1 2 Cash flow ($) 2,800,000 2,450,000 10% decrease from year2 1,300,000 3 4 Required: 1. Calculate ARR marks) 2. Decide whether company will purchase new equipment or not if the expected rate of return is 12%. (1 16 marks) 3. What is the disadvantage to company if they are using ARR method? mark) 4. Calculate the payback period marks) 5. Decide whether company will accept or reject the proposal if the targeted payback period is 2 years. (2marks) 6. What is the advantage to company if they are using pay back method? 2marks) 7. Calculate NPV, if required rate of return is 12% marks) 8. Should company accept or reject project as per NPV and why? marks) 9. Why company has finally decided to use NPV method for capital budgeting? marks) (10 (2 I 12