The purchase of a new machine would incur an upfront cost of $300,000, with an expected cash inflow of $80,000/year for five years, based on the resulting cost savings in enhanced productivity and reduced maintenance. The company’s minimum attractive rate of return (MARR) is 12.5%.
(a) What is the payback period?
(b) What is the accounting rate of return (AROR)?
(c)What is the net present value (NPV)?
(d) What is the internal rate of return (IRR)?
(e) Should the company pursue this? Why or why not?
(f) Explain the value of each approach to CBA, and where it is appropriate (or not) to use each method. Include their relative advantages and limitations.