A company is considering the purchase of a piece of equipment with a cost of $500,000....

  

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A company is considering the purchase of a piece of equipment with a cost of $500,000. The equipment is expected to have a useful life of ten years with a salvage value of $50,000 at the end of that time. The company expects to have the following cash revenues and expenses from the equipment over its life. Year 1 2 3 4 5 6 7 8 9 10 S Cash Revenues 400,000 $ 500,000 550,000 600,000 600,000 550,000 550,000 500,000 450,000 400,000 Cash Expenses 360,000 420,000 450,000 480,000 550,000 450,000 470,000 420,000 380,000 350,000 The company will use the 150% declining balance depreciation method for depreciating the equipment. The company has an effective tax rate of 30%. Management wants all projects to earn a minimum rate of return of 10% on an after tax basis and all projects to pay back their initial investment on an after tax basis in 6.5 years or less. REQUIRED: (1) Compute the following items for this project on an after tax basis. Be sure to show all appropriate supporting computations. (a) (2) (b) (c) Accounting rate of return on average investment. Round your answer to four decimal places. Cash payback period. Round your answer to two decimal places. Net present value. Round your answer to the nearest whole dollar. Should the company invest in the equipment? Explain your answer. A company is considering the purchase of a piece of equipment with a cost of $500,000. The equipment is expected to have a useful life of ten years with a salvage value of $50,000 at the end of that time. The company expects to have the following cash revenues and expenses from the equipment over its life. Year 1 2 3 4 5 6 7 8 9 10 S Cash Revenues 400,000 $ 500,000 550,000 600,000 600,000 550,000 550,000 500,000 450,000 400,000 Cash Expenses 360,000 420,000 450,000 480,000 550,000 450,000 470,000 420,000 380,000 350,000 The company will use the 150% declining balance depreciation method for depreciating the equipment. The company has an effective tax rate of 30%. Management wants all projects to earn a minimum rate of return of 10% on an after tax basis and all projects to pay back their initial investment on an after tax basis in 6.5 years or less. REQUIRED: (1) Compute the following items for this project on an after tax basis. Be sure to show all appropriate supporting computations. (a) (2) (b) (c) Accounting rate of return on average investment. Round your answer to four decimal places. Cash payback period. Round your answer to two decimal places. Net present value. Round your answer to the nearest whole dollar. Should the company invest in the equipment? Explain your answer.

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working calculation of cash flows and income from operations Year Cash Revenue C Cash expenses E Depreciation D Income before taxes ICED Income tax TI... View the full answer