Edge Company’s production vice president believes keeping up-to-date with technological changes is what makes the company successful and feels that a machine introduced recently would fill an important need. The machine has an estimated useful life of four years, a purchase price of $250,000, and a residual value of $25,000. The company controller has estimated average annual net income of $11,250 and the following cash flows for the new machine:Cash Flow EstimatesYearCash InflowsCash OutflowsNet Cash Inflows1$325,000$250,000$75,0002320,000250,00070,0003315,000250,00065,0004310,000250,00060,000 The company uses a 12 percent minimum rate of return and a three-year payback period for capital investment evaluation purposes. REQUIREDAnalyze the data about the machine. Use the following evaluation approaches in your analysis:The net present value method (Round to the nearest dollar.)The accounting rate-of-return method. (Round percentage to one decimal place.)The payback period method (Round to one decimal place.) [Hint: Use Tables 1 and 2 in Appendix C.]ACCOUNTING CONNECTION> Summarize the information generated in requirement 1, and make a recommendation. Enter the appropriate amount or item in the shaded cells. Use the drop-down lists when available.An asterisk (*) will appear next to an incorrect entry in the outlined cells.Leave no cell blank. Ensure to enter "0" wherever applicable. Round PV factors to three decimal places.Net present value methoda.YearNet Cash Inflows12% FactorPresent Value175,00070,000%3!2%3D365,000%3D460,000%3D25,000Total present valueLess purchase price of machine4!3!250,000Net present valueb.Accounting Rate of ReturnAverage Annual Net IncomeAverage Investment Cost%3D11,250137,500%3D8.2%%3D Payback period methodTotal cash investmentLess cash flow recovery:$ 250,000Year$ 75,000270,000365,00040,000Unrecovered investmentPayback period is3.7yearsNet present valueAccounting rate of returnPayback period8.2%3.7years

Capital budgeting is a technique that helps in the determination of profitability and feasibility of…

Answered: REQUIRED Analyze the data about the…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Edge Company’s production vice president believes keeping up-to-date with technological changes is what makes the company successful and feels that a machine introduced recently would fill an important need. The machine has an estimated useful life of four years, a purchase price of $250,000, and a residual value of $25,000. The company controller has estimated average annual net income of $11,250 and the following cash flows for the new machine:

Cash Flow Estimates

Year	Cash Inflows	Cash Outflows	Net Cash Inflows
1	$325,000	$250,000	$75,000
2	320,000	250,000	70,000
3	315,000	250,000	65,000
4	310,000	250,000	60,000

The company uses a 12 percent minimum rate of return and a three-year payback period for capital investment evaluation purposes.

REQUIRED

Analyze the data about the machine. Use the following evaluation approaches in your analysis:
1. The net present value method (Round to the nearest dollar.)
2. The accounting rate-of-return method. (Round percentage to one decimal place.)
3. The payback period method (Round to one decimal place.) [Hint: Use Tables 1 and 2 in Appendix C.]
ACCOUNTING CONNECTION> Summarize the information generated in requirement 1, and make a recommendation.

Enter the appropriate amount or item in the shaded cells. Use the drop-down lists when available.
An asterisk (*) will appear next to an incorrect entry in the outlined cells.
Leave no cell blank. Ensure to enter "0" wherever applicable. Round PV factors to three decimal places.
Net present value method
a.
Year
Net Cash Inflows
12% Factor
Present Value
1
75,000
70,000
%3!
2
%3D
3
65,000
%3D
4
60,000
%3D
25,000
Total present value
Less purchase price of machine
4
!3!
250,000
Net present value
b.
Accounting Rate of Return
Average Annual Net Income
Average Investment Cost
%3D
11,250
137,500
%3D
8.2%
%3D

Payback period method
Total cash investment
Less cash flow recovery:
$ 250,000
Year
$ 75,000
2
70,000
3
65,000
40,000
Unrecovered investment
Payback period is
3.7
years
Net present value
Accounting rate of return
Payback period
8.2%
3.7
years

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