Capital Investment Decision: Comprehensive
Chapter 10 – P4. Edge Company’s Production vice president believes keeping up-to-date with technological changes is what makes the company successful and feels that a machine introduced recently would fill an important need. The machine has an estimated useful life of four years, a purchase price of $250,000 and a residual value of $25,000. The company controller has estimated average annual net income of $11,250 and the following cash flows for the new machines:
Cash flow Estimates
Year Cash inflows Cash outflows Net cash Inflows
1 $325,000 $250,000 $75,000
2 320,000 250,000 70,000
3 315,000 250,000 65,000
4 310,000 250,000 60,000
The company uses a 12% minimum rate of return and a three-year payback period for capital investment evaluation processes.
Compute:
a. Net present value
b. Accounting rate of return
c. Payback period
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