The Arcadia Manufacturing Company, based in Arcadia, FL is one of the fastest- growing companies in its industry. According to Ms. Prinze, the company's production vice president, keeping up-to-date with technological changes is what makes the company successful.
Prinze believes a new machine will 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 machine:
Cash Flow Estimates
Year Cash Flows 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
Prinze uses a 12 percent minimum rate of return and a three-year payback period for capital investment evaluation purposes.
Required:
1. Analyze the data about the machine, and decide if the company should purchase it. Use the following evaluation approaches in your analysis: (a) the net present value method, (b) the accounting rate-of-return method, and (c) the payback period method. Use table 1 and 2 in the appendix on the present value tables.
2. Summarize the information generated in requirement 1, and make a recommendation to Prinze.