A company is considering purchasing equipment costing $160,000 to expand their business. The equipment is...
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Accounting
A company is considering purchasing equipment costing $160,000 to expand their business. The equipment is expected to have a useful life of 10 years with no disposal value. The estimated savings in cash operating costs are as follows:
Year Amount
1 80,000
2 70,000
3 50,000
4 30,000
The company requires a rate of return of 10% in its capital budgeting decisions. Ignore the impact of income taxes and assume all cash flows occur at the end of the year except for the initial investment.
Compute net present value (using the present value table in the textbook), payback period (rounded to 2 decimal places, discounted payback period (rounded to 2 decimal places), and accrual accounting rate of return based on the net initial investment (rounded to 2 decimal places). Assume the straight-line depreciation method is applied and use the average annual savings in cash operating costs when computing the numerator for the accrual accounting rate of return.
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