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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883

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Survey of Accounting (Accounting I)

8th Edition
Carl Warren
ISBN: 9781305961883
Textbook Problem

Identify error in capital investment analysis calculations

Fireproofing Solutions Inc. is considering the purchase of automated machinery that is expected to have a useful life of eight years and no residual value. The average rate of returnon the average investment has been computed to be 15%, and the cash payback period wascomputed to be 10 years.

Do you see any reason to question the validity of the data presented? Explain.

To determine

Concept introduction:

Capital Investment:

The investment made for expanding business or in any project or purchasing capital assets for the business.

Cash payback period:

The time taken for earning the amount of investment made through the net cash flows.

The reason, if any, against the data.

Explanation

The reason for not accepting the data provided in the question is that the question provides that the investment in machine will be generate an average rate of return of 15% and the cash payback period is 10 years. The useful life of machine is 8 years

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