Sky is also considering acquiring a piece of machinery that helps her print designs on new or used skateboards, regardless of which business plan she ends up selecting to move forward with. Please treat this acquisition separate from any other analysis you prepare for income projections; it should not be included in any projections you put together. Below, you’ll find the details of this purchase: Initial Investment $75,000 Estimated useful life 12 years Salvage Value $3,000 Estimated Annual Cash Flows Increased Cash Inflows from Machinery $7,000 Operating and Maintenance Costs ($2,000) Reduction in Manual Labour $3,000 Net Annual Cash Flow $8,000 If she were to acquire this asset, she would have to take out a $75,000 loan for which 5% interest on principal only will be charged annually. She is wondering the following: • Is this a good investment and why or why not? Please discuss quantitative and qualitative factors to consider. • She heard the term ‘pay-back period’, what does this mean and what would be considered a ‘good’ payback period for her? • What accounting entries (Debits and Credits) might she have to book upon purchasing the asset? • What accounting entries (Debits and Credits) might she have to book after a full year of using the asset, assuming she elects to use the straight-line depreciation method?
Investment Analysis & Accounting Treatment for New Asset
Sky is also considering acquiring a piece of machinery that helps her print designs on new or used skateboards, regardless of which business plan she ends up selecting to move forward with. Please treat this acquisition separate from any other analysis you prepare for income projections; it should not be included in any projections you put together. Below, you’ll find the details of this purchase:
Initial Investment
$75,000
Estimated useful life
12 years
Salvage Value
$3,000
Estimated Annual Cash Flows
Increased
$7,000
Operating and Maintenance Costs
($2,000)
Reduction in Manual Labour
$3,000
Net Annual Cash Flow
$8,000
If she were to acquire this asset, she would have to take out a $75,000 loan for which 5% interest on principal only will be charged annually.
She is wondering the following:
• Is this a good investment and why or why not? Please discuss quantitative and qualitative factors to consider.
• She heard the term ‘pay-back period’, what does this mean and what would be considered a ‘good’ payback period for her?
• What accounting entries (Debits and Credits) might she have to book upon purchasing the asset?
• What accounting entries (Debits and Credits) might she have to book after a full year of using the asset, assuming she elects to use the
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