Assume ABC Company has chosen to invest in new manufacturing equipment. The initial cost of the equipment is $1,200,000. The equipment has a useful life of 20 years. The company uses straight-line depreciation.
Their tax rate is 30%. Their weighted average cost of capital is 10%. The new equipment is expected to increase net cash flows by $500,000 in year 1, $350,000 in years 2 through 4, and $100,000 in years 5 through 10.
Using all four investment assessment methods (IRR, ARR, NPV, or payback), perform the calculations for this project.
Based on just ONE of your calculations should the project be accepted or rejected?
Critique the results of the other three calculations you completed.
Do they all support your accept/reject decision? Which assessment method is the best?