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Fargo (Corp
Fargo (Corp.) is considering the purchase of a new piece of equipment. The equipment costs $50,200 and will have a salvage value of $5,200 after nine years. Using the new piece of equipment will increase Fargo's annual cash flows by $6,200. Fargo has a hurdle rate of 12%. a. How much is Fargo's annual depreciation on the equipment? Depreciation b. What is Fargo's projected annual increase in net income? Net Income
c. What is the accounting rate of return for purchasing the new piece of equipment? (Round your answer to 2 decimal places.) Rate of Return % d. Based on financial factors, should Fargo purchase the new equipment? Yes No
Expert Solution
Solution:
a)
Annual depreciation =Cost - salvage value/ useful life
=$50,200-$5,200/9
=$45,000/9
=$5,000
b)
Projected annual increase in net income = Increase in annual cash flow - Depreciation
=$6,200 -$5,000
=$1,200
c)
Accounting rate of return = (Annual increase in net income/ Cost of equipment )*100
=($1,200/50,200)*100
=$2.39%
d)
No, Fargo should not purchase the new equipment because Accounting rate of return is less than the Hurdle rate
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