Refer to the example given in the accounting rate of return (ARR) section of the text (pages 492–3), a summary of which is given below.

Required:

a Calculate the net present value (NPV) of the proposal to buy the new machine, given a cost of capital for the business of 5 per cent. Should the machine be purchased considering both its calculated ARR (5.96%) and NPV?

Initial purchase of the machine: $200 000 – Estimated useful life 5 years Cash flows during the life of the project (including $35,000) residual value in year 5:

Year 1: $50 000 Year 2: $35 000 Year 3: $45 000 Year 4: $50 000 Year 5: $55 000 b Will the internal rate of return of the project be higher or lower than 5 per cent?