Roberts Originals Co. (ROC) provides new and unique cases and otherassignments to professors each semester to ensure that students will not be able to find the solutions published online. Due to the epidemic of cheating on college campuses everywhere, the demand for the company's products has skyrocketed. In order to keep up with business needs, ROC plans to expand its problem writing capacity. The equipment needed for such an expansion will cost a total of $2,000,000. $1,000,000 of which would be paid today and then $500,000 payments at the end of the next 2 years. ROC currently charges professors $500 per year for their services. The expansion will allow ROC to provide services to an additional 200 professors in year one and an additional 75 professors in each of the following 9 years. Most of ROC's cost are fixed. The only variable costs include the printing of a solutions booklet and an accompanying CD for each professor which costs an average of $30 per professor. The new equipment would be useful for 10 years and have a disposal value of $55,000. ROC uses straight line depreciation. ROC requires a 6% rate of return and has an average tax rate of 30%.
Requirements: 

1. Calculate:

a) The NPV of ROC's potential investment. 

b) The internal rate of return of ROC's potential investment. 

c) The payback period of ROC's potential investment. 

d) The accounting accrual rate of return of ROC's potential investment. 

2. Should ROC buy the equipment to expand?

Answer rating: 100% (QA)

Cost of Equipment 2000000 Payment to be made as under Year 0 today 1000000 Year 1 500000 Year 2 5000... View the full answer