The Raab Company, is expanding its production facilities to include a new product line, a sporty automotive tire rim. Tire rims can now be produced with little labor cost using new computerized machinery. The controller has advised management about two such machines. The details about each machine are as follows:
- XJS Machine HZT Machine
- Cost of machine $500,000 $550,000
- Residual value 50,000 55,000
- Net income 34.965 40,670
- Annual net cash inflows 91,215 90,170
The company's minimum rate of return is 12 percent. The maximum payback period is six years. (Round calculations where necessary)
Requirements:
1. For each machine, compute the projected accounting rate of return.
2. Compute the payback period for each machine.
3. Based on the information from requirements 1 and 2, which machine should be purchased? Why?