Short Description: Evaluation of capital expenditure proposal.
Accounting rate of I'9turn, payback, and NPV 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,{)(H) investment in a macramé 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 now) before depreciation expense by $15, 000 per year. The criteria for approving a new investment are that it has a rate of return of 16% and a payback period of three years or less.
Required:
d. What recommendation would you make to the, management of Busy Beaver Corp. about evaluating capital expenditure proposals? Support your recommendation with the appropriate rationale.