Valencia Industries is considering purchasing a machine that will produce plasti

Question

Valencia Industries is considering purchasing a machine that will produce plastic kitchenware.  The machine would be used for five years, would cost $35,000, and would have a $5000 residual value.  It is expected to increase annual net cash inflows by $8,800.  Valprado uses the straight-line method of depreciation.  Using the above facts and the present value factors below, determine the following.

a) Payback period (Round your answer to two places after the decimal.)

b) Accounting rate of return (Round your answer to one decimal place)

c) Net Present value of the investment based on a 12 percent minimum desired rate of return (Use parentheses to indicate a negative net present value.  Round your answer to the nearest dollar.)

Explanation / Answer

a) Payback period = Investment / cash inflows = $35,000 / 8800 = 3.98 years

b) Accounting rate of return = EBT / Average Investment = $8800/(35000+5000) = 0.22 = 22%

c)

Year Cashflows P.V@12% Discounted Cash inflows 1to5 8800 3.4 29920 5 year 5000 0.507 2535 Sum of cash inflow 32455 Cash outflows 35000 NPV -2545

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