Paper Ltd is in the business of manutacturing corporate diaries. It is considering investing in
new machinery which will reduce the production time of manufacturing their diaries for sale.
The company uses the accounting rate of return in assessing its capital budgeting projects.
Projects are accepted if they produce a return greater than
The cost of the new machinery is R
Details of cash flows associated with the new machinery are as follows:
Expected useful life:
Salvage value:
Cost of capital:
Tax rate:
years straight line depreciation
In addition to the investment above, the company is embarking on a new sales strategy
relevant to the investment which will see an increase in credit terms to boost sales.
Research indicates a increase in the provision for bad debts. Expected credit sales in the
years are as follows:
Round your answer to decimal points.
Required
Advise Paper Ltd whether this investment should be accepted based on the accounting rate
of return. Please provide a reason to support your recommendation.
