Chapter 10 – P4. Edge Company_Capital Investment Decision

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Description

Capital Investment Decision: Comprehensive

Chapter 10 – P4. Edge Company’s Production
vice president believes keeping up-to-date with technological changes is what
makes the company successful and feels that a machine introduced recently would
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 machines:

Cash
flow Estimates

Year Cash inflows 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

The company uses a 12% minimum rate of return
and a three-year payback period for capital investment evaluation processes.

Compute:

a.
Net present value

b.
Accounting rate of return

c.
Payback period

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