ABC Company is considering the purchase of a new machine that would cost $500,000. The machine would have a useful life

Question

ABC Company is considering the purchase of a new machine that would cost $500,000. The machine would have a useful life of 10 years. ABC Company plans on using straight-line depreciation with an estimated salvage value of $0. ABC Company has a hurdle rate of 10% and is subject to an income tax rate of 40%. The annual cash income is estimated to be $125,000. 1. The Accounting Rate of Return (AROR) is: A. 7% B. 8% C. 9% D. 10% 2. The Net Present Value (NPV) is: A. $63,775 B. $73,775 C. $83,775 D. $93,775 3. The Profitability Index (PI) is: A. 1.17 B. 1.27 C. 1.37 D. 1.47 4. The Payback period is: A. 5.263 years B. 6.263 years C. 7.263 years D. 8.263 years 5. Using interpolation, the Internal Rate of Return (IRR) is: A. 10.78% B. 11.78% C. 12.78% D. 13.78%

Help In Homework · Accepted Answer

1) Computation of Accounting Rate of Return (AROR): Accounting Rate of Return = Annual Net Operating Income/Initial Investment Here, Annual Net Operating Income = (Income - Depreciation)*(1-Tax Rate) Depreciation = (Cost-Salvage Value)*Useful Life of Asset = ($500,000-0)/10 = $50,000 Annual Net Operating Income = ($125000-$50,000)*(1-0.40) = $45,000 Initial Investment = $500,000 Accounting Rate of Return = $45,000/$500,000 = 0.09 i.e 9 % So, the correct option is C "9%". 2) Net Present Value is $83,733.88 So, the correct option is C "$83,775". Difference is due to rounding off. 3) Profitability Index is 1.17 So, the correct option is A "1.17". 4) Payback Period is 5.263 years SO, the correct option is A "5.263 years". 5) The interenal rate of return is 13.77% So, the correct option is D "13.78%". Difference is due to rounding off. Download Attachments:

Why Choose Us?

0% AI Guarantee

24/7 Support

Plagiarism Free

Expert Tutors

100% Confidential

On-Time Delivery

ABC Company is considering the purchase of a new machine that would cost $500,000

Expert Solution

Archived Solution