America Cola is considering the purchase of a special-purpose bottling machine for $ 65,000. It is expected

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America Cola is considering the purchase of a special-purpose bottling machine for $ 65,000. It is expected to have a useful life of 4 years with no terminal disposal value. The plant 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

Southern Cola uses a required rate of return of 18% in its capital budgeting decisions. Ignore income taxes in your analysis. Assume all cash flows occur at year-end except for initial investment amounts. Calculate the following for the special purpose bottling machine:

Required

1. Net present value

2. Payback period

3. Discounted payback period

4. Internal rate of return (using the interpolation method)

5. Accrual accounting rate of return based on net initial investment (Assume straight-line depreciation. Use the average annual savings in cash operating costs when computing the numerator of the accrual accounting rate of return.)


Net Present Value
What is NPV? The net present value is an important tool for capital budgeting decision to assess that an investment in a project is worthwhile or not? The net present value of a project is calculated before taking up the investment decision at...
Internal Rate of Return
Internal Rate of Return of IRR is a capital budgeting tool that is used to assess the viability of an investment opportunity. IRR is the true rate of return that a project is capable of generating. It is a metric that tells you about the investment...
Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the...
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Related Book For  book-img-for-question

Cost Accounting A Managerial Emphasis

ISBN: 978-0133428704

15th edition

Authors: Charles T. Horngren, Srikant M. Datar, Madhav V. Rajan

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