Capital Investment Decision P10. USING EXCEL SHEET! Express Corporation wants to
ID: 2490221 • Letter: C
Question
Capital Investment Decision P10.
USING EXCEL SHEET!
Express Corporation wants to buy a new stamping machine. The machine will provide the company with a new product line: pressed food trays for kitchens. Two machines are being considered; the data for each machine follow.
ETZ Machine LKR Machine
Cost of machine $350,000 $370,000
Net income $39,204 $48,642
Annual net cash inflows $64,404 $75,642
Residual value $28,000 $40,000
Estimated useful life in years 10 The company’s minimum rate of return is 16 percent, and the maximum allowable pay- back period is 5.0 years.
Required
1. Compute the net present value for each machine. (Round to the nearest dollar.)
2. Compute the accounting rate of return for each machine. (Round to one decimal place.)
3. Compute the payback period for each machine. (Round to one decimal place.)
4. Accounting Connection From the information generated in requirements 1–3, decide which machine should be purchased. Why?
Explanation / Answer
1.Net present value for each machine
2.Accounting rate of return for each machine
Formula = Net income pa./Intial investment
3.Payback period refers to the period of time required to recoup the funds expended in an investment
4.Decision
in $ ETZ Machine LKR Machine Cost of machine 350,000 370,000 Annual net cash inflows 64,404 75,642 PVIAF(10,16%) 5 5 PV of Cash in flow 311,279 365,595 Residual value 28,000 40,000 PVF(10,16%) 0 0 Add: Pv of terminal value 6,347 9,067 Total pv of Cash inflow 317,626 374,662 NPV (32,374) 4,662Related Questions
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