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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return

Blaylock Company wants to buy a numerically controlled (NC) machine to be used in producing specially machined parts for manufacturers of tractors. The outlay required is $384,000. The NC equipment will last 5 years with no expected salvage value. The expected after-tax cash flows associated with the project follow:

Chapter 12, Problem 36E, Payback, Accounting Rate of Return, Net Present Value, Internal Rate of Return Blaylock Company

Required:

Compute the payback period for the NC equipment.

Compute the NC equipment’s ARR. Round the percentage to one decimal place.

Compute the investment’s NPV, assuming a required rate of return of 10%.

Compute the investment’s IRR.

1.

To determine

Find out the payback period for NC equipment.

Explanation

Payback Period:

The time taken by an investment to recover its original value is known as payback period. It is calculated by dividing the original amount of investment by annual cash flow from the investment.

Use the following formula to calculate payback period:

Paybackperiod=OriginalinvestmentAverageannualcashflow

Substitute $384,000 for original investment and $150,0001 for average annual investment in the above formula.

Paybackperiod=$384,000$150,000=2

2.

To determine

Find out accounting rate of return (ARR) of NC equipment.

3.

To determine

Find out the NPV of the investment using required rate of return as 10%.

4.

To determine

Find out the IRR of the investment.

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