Able Companys management is considering the purchase of a new machine at a cost of $165,000. The

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Question:

Able Company’s management is considering the purchase of a new machine at a cost of $165,000. The machine has a 5 year life expectancy and will generate additional cash flows of $75,000 per year and additional expenses (other than depreciation) of $25,000 per year (all cash). Depreciation will use the straight line method.

Required

1. Compute the Payback period.

2. Compute the Accounting Rate of Return.

3. Compute the Net Present Value.

4. Re-compute the Payback period only if we assume that both revenues and cash expenses increase by 10% each year.