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As a graduate accountant, you are asked by your manager to evaluate two investment projects. Both projects concern the purchase of new machinery. The follow data are available for each project. A

As a graduate accountant, you are asked by your manager to evaluate two investment projects. Both projects concern the purchase of new machinery. The follow data are available for each project. A

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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As a graduate accountant, you are asked by your manager to evaluate two investment projects. Both projects concern the purchase of new machinery. The follow data are available for each project. A Cost of machine Expected net profit Year 1 Year 2 Year 3 Year 4 Estimated residual value at the end of Year 4 100,000 80,000 20,000 5,000 10,000 5,000 5,000 10,000 15,000 10,000 20,000 16,000 Assume the required rate of return for both projects are 15%, and straight-line depreciation is used. a. Calculate Accounting Rate of Return for both projects. b. Calculate the payback period for both projects. c. Calculate the NPV for both projects. d. Based on your answers to part (c), should we accept any of these two projects? Why?
Transcribed Image Text:As a graduate accountant, you are asked by your manager to evaluate two investment projects. Both projects concern the purchase of new machinery. The follow data are available for each project. A Cost of machine Expected net profit Year 1 Year 2 Year 3 Year 4 Estimated residual value at the end of Year 4 100,000 80,000 20,000 5,000 10,000 5,000 5,000 10,000 15,000 10,000 20,000 16,000 Assume the required rate of return for both projects are 15%, and straight-line depreciation is used. a. Calculate Accounting Rate of Return for both projects. b. Calculate the payback period for both projects. c. Calculate the NPV for both projects. d. Based on your answers to part (c), should we accept any of these two projects? Why?
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