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 $50,000 investment in a machine 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 flows) before depreciation expense by $15,000 per year. The criteria for approving a new investment are that it have a rate of return of 16% and a payback period of three years or less.
| Requirement 1: |
| (a) |
Calculate the accounting rate of return on this investment for the first year. Assume straight-line depreciation. (Round your answer to 1 decimal place. Omit the "%" sign in your response.)
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| (b) |
Based on this analysis, would the investment be made? |
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| Requirement 2: |
| (a) |
Calculate the payback period for this investment. (Round your answer to 2 decimal places.) |
| (b) |
Based on this analysis, would the investment be made? |
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| Requirement 3: |
| (a) |
Using alculate the net present value of this investment using a cost of capital of 16%. (Round pv factor to 4 decimal places, intermediate calculations and final answer to the nearest dollar amount. Omit the "$" sign in your response.)
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