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Googly Coffees is considering the purchase of a special-purpose coffee machine for $65 000. It...

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Question

Accounting

Googly Coffees is considering the purchase of a special-purpose coffee machine for $65 000. It is expected to have a useful life of 4 years with no terminal disposal value. The manager estimates the following savings in cash operating costs:

Year

Amount

1

$25 000

2

22 000

3

21 000

4

20 000

Total

$88 000

Googly coffees uses a required rate of return of 18% in its capital budgeting decisions. Ignore income taxes in your analysis. Assume that all cash flows occur at year-end except for initial investment amounts. The manager is certain that the machine is a worthwhile investment since the savings are greater than the cost.

Required

  1. Calculate the following for the special-purpose coffee machine and explain the results to the shop manager:
  1. net present value
  2. payback period
  3. accrual accounting rate of return based on net initial investment (assume straight-line depreciation)
  4. B)Discuss three factors that Googly coffees should consider in deciding whether to purchase the machine?

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