Question
In: Accounting
Advanced Technology Ltd is considering the various benefits that may result from a shortening of its...
Advanced Technology Ltd is considering the various benefits that may result from a shortening of its production cycle time by changing from the company’s present manual system to a computer-aided manufacturing design/computer-aided manufacturing (CAD/CAM) system. The annual cash expense of maintaining the current manual system is $300,000.
The annual cash expense of maintaining the new CAD/CAM system is estimated to be $180,000, with the initial investment of $445,000. The estimated life of the new CAD/CAM system for taxation purposes is 5 years with zero salvage value.
The taxation rate is 30% and Advanced Technology will use straight-line depreciation method for both accounting and tax purposes. Advanced Technology requires a minimum after-tax rate of return of 14 per cent.
Required:
- Calculate the following:
- After-tax cash flow and after-tax profit.
- Payback period.
- Net present value.
- Internal rate of return.
- Accounting rate of return.
- Beyond the above financial concerns, what other factors should the firm take into account when review this proposal?
- Overall, should the investment go ahead and why?
Solutions
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