The Alpha Printer Company is considering the purchase of a $2 million printing machine. Its economic life is estimated at five years, and it will have no resale value after that time. The machine would generate an additional $200,000 of earnings after tax for the company during the first year of operation that will grow at a rate of 10 percent per year afterward. The company applies straight- line depreciation to its property, plant, and equipment assets. What is the average accounting return of the investment? Should the machine be bought if the firm’s target average accounting return on its investment is 20 percent? Would you feel comfortable with your decision based on this approach to capital budgeting?
Why or why not?
Why or why not?
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