Question
Terrell Corp. management is considering purchasing a machine that will cost $117,250 and will be depreciated on a straight-line basis over a five-year period. The
- Terrell Corp. management is considering purchasing a machine that will cost $117,250 and will be depreciated on a straight-line basis over a five-year period. The sales and expenses (excluding depreciation) for the next five years are shown in the following table. The companys tax rate is 34 percent. Terrell will accept all projects that provide an accounting rate of return (ARR) of at least 45 percent. Should the company accept the project?
|
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
| Sales | $123,450 | $176,875 | $242,455 | $255,440 | $267,125 |
| Expenses | 137,410 | 126,488 | 141,289 | 143,112 | 133,556 |
| Depreciation | 23,450 | 23,450 | 23,450 | 23,450 | 23,450 |
| EBIT | $ (37,410) | $ 26,937 | $ 77,716 | $ 88,878 | $110,119 |
| Taxes (34%) | 12,719 | 9,159 | 26,423 | 30,219 | 37,440 |
| Net Income | $ (24,691) | $ 17,778 | $ 51,293 | $ 58,659 | $ 72,679 |
| Beginning Book Value | 117,250 | 93,800 | 70,350 | 46,900 | 23,450 |
| Less: Depreciation | (23,450) | (23,450) | (23,450) | (23,450) | (23,450) |
| Ending Book Value | $ 93,800 | $ 70,350 | $ 46,900 | $ 23,450 | $ 0 |
Average net income =
Average book value =
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Finance And Financial Markets
Authors: Keith Pilbeam
2nd Edition
1403948356, 978-1403948359
