Busy Beaver Corp. is interested in reviewing its method of evaluating capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $50,000 investment in a machine that had an estimated useful life of five years and an estimated salvage value of $10,000. The machine was expected to increase net income (and cash flows) before depreciation expense by $15,000 per year. The criteria for approving a new investment are that it have a rate of return of 16% and a payback period of three years or less.
Requirement 1:
(a)Calculate the accounting rate of return on this investment for the first year. Assume straight-line depreciation. (Round your answer to 1 decimal place. Omit the "%" sign in your response.)Accounting rate of return %
(b) Based on this analysis, would the investment be made?
Requirement 2:(a) Calculate the payback period for this investment. (Round your answer to 2 decimal places.)
(b) Based on this analysis, would the investment be made?
Requirement 3:
(a)Using Table 6-4, calculate the net present value of this investment using a cost of capital of 16%. (Round pv factor to 4 decimal places, intermediate calculations and final answer to the nearest dollar amount. Omit the "tiny_mce_markerquot; sign in your response.)
Net present value $
(b) Based on this analysis, would the investment be made?