Question

ollie Company, produces trucks. Considering the environment and following government rule, the company is considering changing its degreaser machine to clean water from engine oil, before the water is thrown to the creek behind the factory. This investment requires $ 5 000 000. The machine needs a special installation and it costs $ 50 000. It is estimated that this machine will last five years with $ 500 000 salvage value. The expected incremental after-tax cash flows (cash flows of the new machine minus cash flows of the old machine) associated with the investment are as follow:

YEAR	CASH BENEFITS	CASH EXPENSES
1	$3 200 000	$1 800 000
2	3 300 000	1 100 000
3	3 900 000	3 000 000
4	3 100 000	2 750 000
5	2 900 000	1 750 000

Vollie has a cost of capital equal to 14%. The company applies a straight-line depreciation method.

REQUIRED:

1.    Compute the Accounting Rate of Return (1 mark)

2.    Calculate the NPV of the proposed project

3.    Based on payback and NPV, provide your opinion, should accept or reject the project. Justify your answer (1 mark)

4.    Explain the impacts of your decision in (3) to the business sustainability/ environmental performance

Need help immediately in answering this question

Answer 1

Please refer attached file for solution of 1 to 3.

4) Payback and NPV gives consistent results. If the projects are independent (and
there is no capital rationing), In the present case,
Both criteria payback period and NPV is satisfied Under the
assumption of 14% discount rate, ranking according to payback and NPV gives same results hence, the NPV rule tells that Project is the best. The NPV rule generally gives
consistent results in conformity with the wealth maximization principle. Therefore,
Project should be accepted following the NPV rule.