Capital Investment Decision: Comprehensive

Chapter 10 – P4. Edge Company’s Production vice president believes keeping up-to-date with technological changes is what makes the company successful and feels that a machine introduced recently would fill an important need. The machine has an estimated useful life of four years, a purchase price of $250,000 and a residual value of $25,000. The company controller has estimated average annual net income of $11,250 and the following cash flows for the new machines:

Cash flow Estimates

Year Cash inflows Cash outflows Net cash Inflows

1 $325,000 $250,000 $75,000

2 320,000 250,000 70,000

3 315,000 250,000 65,000

4 310,000 250,000 60,000

The company uses a 12% minimum rate of return and a three-year payback period for capital investment evaluation processes.

Compute:

a. Net present value

b. Accounting rate of return

c. Payback period