Googly Coffees is considering the purchase of a special-purpose coffee machine for $65 000. It...
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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
Calculate the following for the special-purpose coffee machine and explain the results to the shop manager:
net present value
payback period
accrual accounting rate of return based on net initial investment (assume straight-line depreciation)
B)Discuss three factors that Googly coffees should consider in deciding whether to purchase the machine?
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