Question
Tablerock Corporation is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a
Tablerock Corporation is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $91,000 investment in a machine that had an estimated useful life of five years and an estimated salvage value of $24,000. The machine was expected to increase net income (and cash flows) before depreciation expense by $30,000 per year. The criteria for approving a new investment are that it have a rate of return of 12% and a payback period of three years or less. Use Table 6-4.
Note: Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.
Required:
- Calculate the accounting rate of return on this investment for the first year. Assume straight-line depreciation. Based on this analysis, would the investment be made?
- Calculate the payback period for this investment. Based on this analysis, would the investment be made?
- Calculate the net present value of this investment using a cost of capital of 12%. Based on this analysis, would the investment be made?
- What recommendation would you make to the management of Tablerock Corporation about evaluating capital expenditure proposals?
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