accounting rate of return for Option 1, 2, & 3
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The senior VP in charge has asked that you make a recommendation for the purchase of new equipment.
Ideally, the company wants to limit its capital investment to $500,000. However, if an asset merits
spending more, an investment exceeding this limit may be considered. You assemble a team to help
you. Your goal is to determine which option will result in the best investment for the company. To
encourage capital investments, the government has exempted taxes on profits from new investments.
This legislation is to be in effect for the foreseeable future.
The average reported operating income for the company is $1,740,000.
The company uses a 10% discount rate in evaluating capital investments.
The team is considering the following options
Option 1:
The asset cost is $300,000.
The asset is expected to have an 8-year useful life with no salvage value.
Straight-line depreciation is used.
The net
A significant portion of this asset is made from recycled material.
When disposed of, certain parts of the asset can be recycled.
The delivery time for this asset is 8 weeks.
Option 2:
The asset cost is $521,000.
The machine is expected to have a 6-year useful life with no salvage value.
Straight-line depreciation is used.
The net cash inflow is expected to be $142,000 each year for 6 years.
This asset is the smallest and most efficient in its product line.
The delivery time for this asset is 6 weeks.
Option 3:
The asset cost is $280,000,
The asset is expected to have a 4-year useful life with no salvage value.
Straight-line depreciation is used.
The net cash inflow is expected to be $89,000 each year for 4 years.
This asset has a lower-than-normal rating because of frequent maintenance needs.
This asset is similar to the existing unit and would require the least amount of training time for
employees.
The delivery time for this asset is 3 weeks.
please help....
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