problem: Accounting rate of return, NPV and payback Busy Beaver Corporation is interested in reviewing its method of capital expenditure proposals using accounting rate of return method! A recent proposal involved a $50, investment in a macramé that had an estimated useful life of five (5) years & an estimated salvage value of $10,000. The machine was expected to rise net income (& cash knows) before depreciation expense by $J5, 000 per year. The criteria for approving a new investment are that it has a rate of return of 16 percent & a payback period of three (3) years or less.
Determine the net present value of this investment using a cost of capital of 16 percent. Based on this analysis, would the investment be made? describe your reasoning.