Question

1. CMT Company uses the accounting rate of return method to evaluate proposed capital investments. The company's desired rate of return is 15%. The project being evaluated involves a new product that will have a three-year life. The investment required is $120,000, which consists of a $100,000 machine, and inventories and accounts receivable totalling $20,000. The machine will have a useful life of three years and a salvage value of $25,000. The salvage value will be received during the fourth year, and the inventories and accounts receivable related to the product also will be converted back to cash in the fourth year. Accrual accounting net income from the product will be $29,000 per year, before depreciation expense, for each of the three years. Because of the time lag between selling the product and collecting the accounts receivable, cash flows from the product will be as follows:
1st year       2nd year        3rd year           4th year
$   25,410 $   43,560 $   52,635 $   36,300
a. Calculate the accounting rate of return for the first year of the product. Assume straight-line depreciation. Based on this analysis, would the investment be made? Explain your answer.
b. Using a discount rate of 15% and assuming that cash flows occur at the end of the respective years, calculate the following for the project: net present value, internal rate of return, and profitability index. Based on this analysis, would the investment be made? Explain your answer.
c. Which of these analytical approaches is the more appropriate to use? Explain your answer. please explain
d. Differences between estimates made by the company and actual results would have an effect on the actual rate of return on the project. Identify the significant estimates made by the company. For each estimate, state the effect on the actual ROI if the estimate turns out to be less than the actual amount finally achieved.please whith step

Answer 1

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