Sound Perfection, Inc., a manufacturer of stereo speakers, is thinking about adding a new machine. This machine can produce speaker parts that the company now buys from outsiders. The machine has an estimated useful life of 14 years and will cost $450,000. The residual value of the new machine is $50,000. Gross cash revenue from the machine will be about $300,000 per year, and related cash expenses should total $210,000. Depreciation is estimated to be $30,000 annually. Sound Perfection’s management has decided that only capital investments that yield at least a 20 percent return will be accepted. Using the accounting rate-of-return method, decide whether the company should invest in the machine. Show the computations that support your decision.
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