Rivera
Problem 2 (25 points).
Beethoven Company is considering the purchase of a piece of equipment with a cost of $1,400,000.
The equipment is expected to have a useful life of ten years with a salvage value of $100,000 at the
end of that time. The company expects to have the following cash revenues and expenses from the
equipment over its life.
The
BEETHOVEN COMPANY
DATA FOR CAPITAL BUDGETING ANALYSIS
Year
Cash Revenues
Cash Expenses
1
$ 600,000 $
460,000
2
650,000
490,000
3
750,000
620,000
4
800,000
670,000
5
800,000
720,000
6
850,000
710,000
7
850,000
720,000
8
900,000
720,000
9
950,000
680,000
10
800,000
650,000
The company will use the straight line depreciation method for depreciating the equipment. The
company has an effective tax rate of 30%. Management wants all projects to earn a minimum rate
of return of 11% on an after tax basis and all projects to pay back their initial investment on an after
tax basis in 6.0 years or less.
REQUIRED: (1) Compute the following items for this project on an after tax basis. Be sure
to show all appropriate supporting computations.
(a)
Accounting rate of return on average investment. Round your answer
to four decimal places.
(b)
Cash payback period. Round your answer to two decimal places.
(c)
Net present value. Round your answer to the nearest whole dollar.
(2)
Should the company invest in the equipment? Explain your answer.
