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Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows: Required: 1. Compute the project’s payback period. 2. Compute the project’s accounting rate of return. 3. Compute the project’s net present value, assuming a required rate of return of 10 percent. 4. Compute the project’s internal rate of return.

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Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663

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Chapter
Section
BuyFindarrow_forward

Cornerstones of Cost Management (C...

4th Edition
Don R. Hansen + 1 other
Publisher: Cengage Learning
ISBN: 9781305970663
Chapter 19, Problem 10E
Textbook Problem
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Roberts Company is considering an investment in equipment that is capable of producing more efficiently than the current technology. The outlay required is $2,293,200. The equipment is expected to last five years and will have no salvage value. The expected cash flows associated with the project are as follows:

Chapter 19, Problem 10E, Roberts Company is considering an investment in equipment that is capable of producing more

Required:

  1. 1. Compute the project’s payback period.
  2. 2. Compute the project’s accounting rate of return.
  3. 3. Compute the project’s net present value, assuming a required rate of return of 10 percent.
  4. 4. Compute the project’s internal rate of return.

1.

To determine

Ascertain the payback period of the given project.

Explanation of Solution

Payback period: Payback period is the expected time period which is required to recover the cost of investment. It is one of the capital investment method used by the management to evaluate the proposal of long-term investment (fixed assets) of the business. But payback method has high risk than other method, because it does not follow the time value of money concept in valuing the cash inflows.

Ascertain the payback period of the given project:

PaybackPeriod=

2.

To determine

Compute the accounting rate of return of the given project.

3.

To determine

Ascertain the net present value of the project for a 10% required rate of return.

4.

To determine

Compute the internal rate of return of the given project.

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Chapter 19 Solutions

Cornerstones of Cost Management (Cornerstones Series)
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