Question

nc on Publications uses the accounting ate of return me od to evaluate proposed capital im estments. The company's desired ate of etu is 15.0% The p ect being evaluated in oves a ne product that will have a three-year life The vestment required is $330,000, which consists of a $275,000 machine, and inventories and accounts receivable totaling S55,000. The machine will have a useful life of three years and a salvage value of $157,500. The salvage value will be received during the fourth year, and the inventories and accounts receivable related to the product also will be converted back to cash in the fourth year. Accrual accounting net income from the product will be S90,000 per year, before depreciation expense, for each of the three years. Because of the time lag between selling the product and collecting the accounts receivable, cash flows from the product will be as follows Use Table 6-4. (Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.) st year 2nd year 3rd year 4th year $45,000 75,000 90,000 63,000 Required: a-1. Calculate the accounting rate of return for the first year of the product. Assume straight-line depreciation (Do not round intermediate calculations. Round your answer to 2 decimal places.) rate of retum a-2. Based on this analysis, would the investment be made? O No O Yes b-1. Calculate the net present value of the product us g a discount rate o 150% and assuming that cash lows occur at the end of the respective ears Negative amounts should be indicated by a minus sign. Do not round intermediate b-2. Based on this analysis, would the investment be made? O Yes No

Answer 1

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