1.A company buys a machine for $75,000 that has an expected life of 8 years and...

1.A company buys a machine for $75,000 that has an expected life of 8 years and no salvage value. The company uses straight-line depreciation. The company anticipates a yearly net income of $3,600 after taxes of 24%, with the cash flows to be received evenly throughout each year. What is the accounting rate of return?

2.If Management was not concerned with the time value of money, from which two capital budgeting methods should they choose?

Vextra Corporation is considering the purchase of new equipment costing $35,000. The projected annual cash inflow is $11,000, to be received at the end of each year. The machine has a useful life of 4 years and no salvage value. Vextra requires a 12% return on its investments. The present value of an annuity of $1 for different periods follows:

Periods	12%
1	0.8929
2	1.6901
3	2.4018
4	3.0373

What is the net present value of the machine?

4.Which one of the following methods considers the time value of money in evaluating alternative capital expenditures?

Solutions

Expert Solution

Answer:

1. Accounting rate of return

Accounting rate of return = Average Net income after taxes / Initial investment

= $3,600 / $75,000

= 4.8%

If the management is not concerned about Time value of money,then the company can choose Accounting rate of return and Payback period as Capital Budgeting methods.

3. Net Present value of the machine

Net Present value = Present value of total cash inflows - Present value of total cash outflows

Present value of total cash outflows

Present value of total cash outflows = $35,000

Present value of total cash inflows

Present value of total cash inflows = Annual cash inflows * Annuity factor for 4 years at 12%

= $11,000 * 3.0373

= $33,410.3

Net Present value = Present value of total cash inflows - Present value of total cash outflows

= $33,410.3 - $35,000

= ($1,589.7)

Net Present value considers time value of money in evaluating alternative capital expenditures.

Profitability ratio also considers time value of money in evaluating alternative capital expenditures.

ekkarill92 answered 1 year ago

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