Capital Budgeting Decision Methods
Martin Blue. the owner of The Blue Cafe, is considering to invest in new
kitchen equipment. The total cost of the project is $105,000 and the
equipments will have projected useful life of 7 years with no salvage value. He
projects the incremental annual earnings before taxes and depreciation for the
project as reported in the table below. His business is subject to 20% income
tax and Mr. Blue uses straight-line depreciation for all fixed assets. The
required rate of return for similar risk projects is 8%. The expected payback
threshold for this project is 5 years and acceptable accounting rate of return is
22%
Given the information, help Mr. Blue determine the followings and whether
the project is acceptable under each model considered.
1. Determine the accounting rate of return of the project.
2. Determine payback period of the projects.
3. Determine the discounted payback period of the project.
4. Determine net present value of the project.
5. Determine the profitability index of the porjects.
6. Determine the internal rate of return of the project.
Year
Earnings before Taxes and Deprecitation
1
\$
32,450
2
\$
31,900
3
\$
29,500
4
\$
28,900
5
\$
28,300
6
\$
27,250
7
\$
26,880