The Banner Company (BC) has recently carried out research which indicates that with an investment in a machine that would cost $300,000 they would be able to provide to improve their production processes The use of the machine would take place throughout the next six years It is estimated that the machine could be disposed of, for $30,000 Zhao, the CEO wants an evaluation of this potential investment Li, the Finance Manager indicates the opportunity cost of finance for investments is 15 while Ram, the Management Accountant indicates that the minimum Payback Period for investments should be 3 years Cash Inflows and Outflows from the machine investment would be expected to be as follows Time $000 ImmediatelyCost of machine(300)1 years timeOperating profit before depreciation502 years timeOperating profit before depreciation903 years time Operating profit before depreciation1404 years timeOperating profit before depreciation1505 years timeOperating profit before depreciation806 years timeOperating profit before depreciation606 years timeDisposal proceeds from the machine30 Show all your workings clearly for this section of the paper and round relevant final calculations to two decimal places Required What is the Accounting Rate of Return (ARR) of buying the machine What is the payback period for Banner Company if they were to invest in the purchase of the machine Determine the NPV of the machine investment project for Banner Company Assume a 15 percent opportunity cost of finance (Use the Present Value table provided) What is the internal rate of return (IRR) of the machine investment project for Banner Company (Use the Present Value table provided Hint Trial and Error You already know the NPV of this project at 15 Try either 20 or 25 Round your calculations to two decimal places ) Using your answers from (a), (b), (c) and (d), explain whether or not Banner Company should proceed with the machine investment project Present value of 1 , that is, (1 r)1t where r discount rate n number of periods until payment Discount rate (r) Present value table continued Period (n)16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 0 8620 8560 8470 8400 8330 8260 8200 8130 8060 8000 7940 7870 7810 7750 769 20 7430 7310 7180 7060 6940 6830 6720 6610 6500 6400 6300 6200 6100 6010 592 30 6410 6240 6090 5930 5790 5640 5510 5370 5240 5120 5000 4880 4770 4660 455 40 5520 5340 5160 4990 4820 4670 4510 4370 4230 4100 3970 3840 3730 3610 350 50 4760 4560 4370 4190 4020 3860 3700 3550 3410 3280 3150 3030 2910 2800 289 70 3540 3330 3140 2960 2790 2630 2490 2350 2220 2100 1980 1880 1780 1680 159 100 2270 2080 1910 1760 1620 1800 1670 1550 1440 1340 1250 1160 1080 1010 094 120 1680 1520 1370 1240 1120 1020 0920 0830 0760 0690 0620 0570 0520 0470 043 150 1080 0950 0840 0740 0650 0570 0510 0450 0400 0350 0310 0280 0250 0220 020 170 0800 0690 0600 0520 0450 0390 0340 0300 0260 0230 0200 0170 0150 0130 012 180 0690 0590 0510 0440 0380 0320 0280 0240 0210 0180 0160 0140 0120 0100 009 200 0510 0430 0370 0310 0260 0220 0190 0160 0140 0120 0120 0110 0090 0060 007

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The Banner Company (BC) has recently carried out research which indicates that with an investment in a machine that would cost $300,000; they would be

The Banner Company (BC) has recently carried out research which indicates that with an investment in a machine that would cost $300,000; they would be able to provide to improve their production processes. The use of the machine would take place throughout the next six years. It is estimated that the machine could be disposed of, for $30,000.

Zhao, the CEO wants an evaluation of this potential investment. Li, the Finance Manager indicates the opportunity cost of finance for investments is 15% while Ram, the Management Accountant indicates that the minimum Payback Period for investments should be 3 years.

Cash Inflows and Outflows from the machine investment would be expected to be as follows:

Time $000ImmediatelyCost of machine(300)1 years timeOperating profit before depreciation502 years timeOperating profit before depreciation903 years time Operating profit before depreciation1404 years timeOperating profit before depreciation1505 years timeOperating profit before depreciation806 years timeOperating profit before depreciation606 years timeDisposal proceeds from the machine30

Show all your workings clearly for this section of the paper and round relevant final calculations to two decimal places.

Required:

What is the Accounting Rate of Return (ARR) of buying the machine?
What is the payback period for Banner Company if they were to invest in the purchase of the machine?
Determine the NPV of the machine investment project for Banner Company. Assume a 15 percent opportunity cost of finance. (Use the Present Value table provided).
What is the internal rate of return (IRR) of the machine investment project for Banner Company? (Use the Present Value table provided. Hint: Trial and Error. You already know the NPV of this project at 15%. Try either 20 % or 25%. Round your calculations to two decimal places.)
Using your answers from (a), (b), (c) and (d), explain whether or not Banner Company should proceed with the machine investment project.

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Present value of 1 , that is, (1+r)1t where: r= discount rate n= number of periods until payment. Discount rate (r) Present value table continued Period (n)16%17%18%19%20%21%22%23%24%25%26%27%28%29%30% 0.8620.8560.8470.8400.8330.8260.8200.8130.8060.8000.7940.7870.7810.7750.769 20.7430.7310.7180.7060.6940.6830.6720.6610.6500.6400.6300.6200.6100.6010.592 30.6410.6240.6090.5930.5790.5640.5510.5370.5240.5120.5000.4880.4770.4660.455 40.5520.5340.5160.4990.4820.4670.4510.4370.4230.4100.3970.3840.3730.3610.350 50.4760.4560.4370.4190.4020.3860.3700.3550.3410.3280.3150.3030.2910.2800.289 70.3540.3330.3140.2960.2790.2630.2490.2350.2220.2100.1980.1880.1780.1680.159 100.2270.2080.1910.1760.1620.1800.1670.1550.1440.1340.1250.1160.1080.1010.094 120.1680.1520.1370.1240.1120.1020.0920.0830.0760.0690.0620.0570.0520.0470.043 150.1080.0950.0840.0740.0650.0570.0510.0450.0400.0350.0310.0280.0250.0220.020 170.0800.0690.0600.0520.0450.0390.0340.0300.0260.0230.0200.0170.0150.0130.012 180.0690.0590.0510.0440.0380.0320.0280.0240.0210.0180.0160.0140.0120.0100.009 200.0510.0430.0370.0310.0260.0220.0190.0160.0140.0120.0120.0110.0090.0060.007