Chapter 10 – P4. Edge Company_Capital Investment Decision

Capital Investment Decision: Comprehensive

Chapter 10 – P4. 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 machines:

                        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% minimum rate of return and a three-year payback period for capital investment evaluation processes.

Compute:

a.   Net present value

b.   Accounting rate of return

c.   Payback period