Question

Hardware Corp. is planning to buy production machinery. This machinery's expected useful life is 5 years, with a $10,000 residual value. They require a minimum rate of return of 12%, and have calculated the following data pertaining to the purchase and operation of this machinery:

Determine the payback period, the accounting rate of return, and the net present value for this investment. (Ignore taxes & indicate answers to 2 decimal places)

Year	Estimated Annual Cash Inflow	Estimated Annual Cash Outflow	Depreciation
1	$60,000	$10,000	$30,000
2	$80,000	$20,000	$30,000
3	$95,000	$25,000	$30,000
4	$115,000	$35,000	$30,000
5	$140,000	$50,000	$30,000

Answer 1

The machinery was initially purchased for (30000 * 5)+10000 (residual value) = $160,000

Initial Cash Flow = -($160,000)

	Year	Estimated Cash inflow	Estimated Cash outflow	Net Cash Flow	Cumulative Cash flow	Depreciation	Net Income	Present Value
	0	0	-160000	-160000	-160000	0		-160000.00
	1	60000	10000	50000	-110000	30000	20000	44642.86
	2	80000	20000	60000	-50000	30000	30000	47831.63
	3	95000	25000	70000	20000	30000	40000	49824.62
	4	115000	35000	80000	100000	30000	50000	50841.45
	5	140000	50000	100000	200000	30000	70000	56742.69
			140000	360000			210000	89883.24
		Payback Period is in between year 2 and year 3
		Payback period = 2yrs + -50000/70000 = 2 yrs + 0.71 = 2.71yrs
		Accounting Rate of Return = (total of Net income/5)/(average investment) = (210000/5)/((160000+10000)/2) = 0.4941 = 49.41%
		Net Present Value = $89,883.24