Calculate the elements of capital budget

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Reference no: EM131828917

Background

Allgood Incorporated is considering purchasing a new machine to replace a current machine. The new machine will cost $390,000 and use working capital of $9,000. The current machine can be sold for $6,500. The new machine has a five-year useful life and no salvage value. The hurdle rate is 8 percent. If the new machine is purchased, the operating cash inflows are listed below:

Year 1 â€“ $130,000.

Year 2 â€“ $130,000.

Year 3 â€“ $130,000.

Year 4 â€“ $130,000.

Year 5 â€“ $130,000 (this includes the $9000 release of working capital).

Instructions

For this assignment, address the following:

Calculate the following elements of a capital budget (ignoring income taxes for this step):

The payback period.

Accounting rate of return.

Internal rate of return.

Assuming an income tax rate of 40 percent, calculate the net present value. Remember to calculate the after-tax cash flows from operations and the tax savings from depreciation expense in your analysis.

Should Allgood purchase the machine? Write 3â€“4 pages justifying your position. Include a discussion of what qualitative factors you would consider.

Reference no: EM131828917

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