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Capital decision
23. Fiji Corp evaluates capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $50000 investment in a machine that has an estimated useful life of five years and an estimated salvage value of $10,000. The machine was expected to increase net profit (and cash flows) before depreciation expense by $15000 per year. The criteria for approving a new investment are that it have a rate of return of 16 per cent and a pay back period of 3 years or less.
Required: a. Calculate the Accounting rate of return on this investment for the first year. Assume straight line depreciation. Based on this analysis, explain giving reasons whether the investment should be made or not b. Calculate the payback period Based on this analysis, explain giving reasons whether the investment should be made or not c. Calculate the net present value of this investment assuming that the cost of capital is 16%. Based on this analysis, explain giving reasons whether the investment should be made or not d. What recommendations would you make to management of Fiji corp about evaluating capital expenditure proposals? |
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:confused: Fiji Corp evaluates capital expenditure proposals using the accounting rate of return method. A recent proposal involved a $50000 investment in a machine that has an estimated useful life of five years and an estimated salvage value of $10,000. The machine was expected to increase net profit (and cash flows) before depreciation expense by $15000 per year. The criteria for approving a new investment are that it have a rate of return of 16 per cent and a pay back period of 3 years or less.
Required: a. Calculate the Accounting rate of return on this investment for the first year. Assume straight line depreciation. Based on this analysis, explain giving reasons whether the investment should be made or not b. Calculate the payback period Based on this analysis, explain giving reasons whether the investment should be made or not c. Calculate the net present value of this investment assuming that the cost of capital is 16%. Based on this analysis, explain giving reasons whether the investment should be made or not d. What recommendations would you make to management of Fiji corp about evaluating capital expenditure proposals?[/QUOTE] |
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