Reference no: EM132631852

Capital Investment Decision: Comprehensive

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.

Required:

Question 1. Analyze the data about the machine. Use the following evaluation approaches in your analysis.

a. Net present value method (round to the nearest dollar).

b. Accounting rate of return method (round percentage to one decimal place).

c. Payback period method (round to one decimal place).