Crichton Publications uses the accounting rate of return method to evaluate proposed capital investments. The company's desired rate of return is 17.0%. The project being evaluated involves a new product that will have a three- year life. The investment required is $370,000, which consists of a $240,000 machine, and inventories and accounts receivable totaling $130,000. The machine will have a useful life of three years and a salvage value of $167,500. The salvage value will be received during the fourth year, and the inventories and accounts receivable related to the product also will be converted back to cash in the fourth year. Accrual accounting net income from the product will be $94,000 per year, before depreciation expense, for each of the three years. Because of the time lag between selling the product and collecting the accounts receivable, cash flows from the product will be as follows: Use Table 6-4. Note: Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals. 1st year $ 49,000 2nd year 79,000 3rd year 94,000 4th year 67,000 Required: 1. Calculate the accounting rate of return for the first year of the product. Assume straight-line depreciation. Based on this analysis, would the investment be made? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. 1. Calculate the net present value of the product using a discount rate of 17.0% and assuming that cash flows occur at the end of the respective years. Based on this analysis, would the investment be made? Note: Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. 1. Which of these two analytical approaches is the more appropriate to use?
Crichton Publications uses the accounting rate of return method to evaluate proposed capital investments. The company's desired rate of return is 17.0%. The project being evaluated involves a new product that will have a three- year life. The investment required is $370,000, which consists of a $240,000 machine, and inventories and accounts receivable totaling $130,000. The machine will have a useful life of three years and a salvage value of $167,500. The salvage value will be received during the fourth year, and the inventories and accounts receivable related to the product also will be converted back to cash in the fourth year. Accrual accounting net income from the product will be $94,000 per year, before depreciation expense, for each of the three years. Because of the time lag between selling the product and collecting the accounts receivable, cash flows from the product will be as follows: Use Table 6-4. Note: Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals. 1st year $ 49,000 2nd year 79,000 3rd year 94,000 4th year 67,000 Required: 1. Calculate the accounting rate of return for the first year of the product. Assume straight-line depreciation. Based on this analysis, would the investment be made? Note: Do not round intermediate calculations. Round your answer to 2 decimal places. 1. Calculate the net present value of the product using a discount rate of 17.0% and assuming that cash flows occur at the end of the respective years. Based on this analysis, would the investment be made? Note: Negative amounts should be indicated by a minus sign. Do not round intermediate calculations. 1. Which of these two analytical approaches is the more appropriate to use?
Chapter1: Financial Statements And Business Decisions
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Transcribed Image Text:Crichton Publications uses the accounting rate of return method to evaluate proposed capital investments. The company's desired rate of return is 17.0%. The project being evaluated involves a new product that will have a three-
year life. The investment required is $370,000, which consists of a $240,000 machine, and inventories and accounts receivable totaling $130,000. The machine will have a useful life of three years and a salvage value of $167,500.
The salvage value will be received during the fourth year, and the inventories and accounts receivable related to the product also will be converted back to cash in the fourth year. Accrual accounting net income from the product
will be $94,000 per year, before depreciation expense, for each of the three years. Because of the time lag between selling the product and collecting the accounts receivable, cash flows from the product will be as follows: Use
Table 6-4.
Note: Use appropriate factor(s) from the tables provided. Round the PV factors to 4 decimals.
1st year $ 49,000
2nd year 79,000
3rd year 94,000
4th year 67,000
Required:
1. Calculate the accounting rate of return for the first year of the product. Assume straight-line depreciation. Based on this analysis, would the investment be made?
Note: Do not round intermediate calculations. Round your answer to 2 decimal places.
1. Calculate the net present value of the product using a discount rate of 17.0% and assuming that cash flows occur at the end of the respective years. Based on this analysis, would the investment be made?
Note: Negative amounts should be indicated by a minus sign. Do not round intermediate calculations.
1. Which of these two analytical approaches is the more appropriate to use?
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