Use net present value-accounting rate-of-return method

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Reference no: EM131354085

Smile photo, inc., is a nationally franchise company with over 50 outlets located in the southern states. part of the franchise agreement promises a centralized photo developing process with overnight delivery to the outlets. Because of the tremendous increase in demand for its photo processing, Emma Dubarry, the corporation's president, is considering the purchase of a new, deluxe photo processing machine by the end of this month. Dubarry wants you to formulate a memo showing your evaluation of this purchase. Your memo will be presented at the board of directors' meeting next week. According to your research, the new machine will cost $320,000. It will function for an estimated five years and should have a $32,000 residual value. All capital investments are expected to produce a 20 percent minimum rate of return, and the investment should be recovered in three years or less. All fixed assets are depreciated using the straight-line method. The forecasted increases in operating results for the new machine are as follows: CASH FLOW ESTIMATES: Year 1 Cash inflow $310,000 Cash outflow $210,000 Year 2 Cash inflow $325,000 Cash outflow $220,000 Year 3 Cash inflow $340,000 Cash outflow $230,000 Year 4 Cash inflow $300,000 Cash outflow $210,000 Year 5 Cash inflow $260,000 Cash outflow $180,000 1. In preparating for writing your memo, answer the following questions: a. What kinds of information do you need to prepare this memo? b. Why is the information relevant? c. Where would you find the information? d. When would you want to obtain the information? 2. Analyze the purchase of the machine and decide if the company should purchase it. Use (a) the net present value method, (b) the accounting rate-of-return method, and (c) the payback period method. 3. What is the profitability index of the project? 4. What is the IRR of the project?

Reference no: EM131354085

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