Nelson Inc. is considering the purchase of a $600,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Nelson can sell all that it could manufacture for the next ten years, the government exempts taxes on profits from new investments. This legislation will most likely remain in effect in the foreseeable future. The equipment is expected to have ten years of useful life with no salvage value. The firm uses the double-declining-balance depreciation method and switches to the straight-line depreciation method in the last four years of the asset's 10-year life. Nelson uses a rate of 10% in evaluating its capital investments. The net cash inflows are expected to be as follows: Required:
1. Under the assumption that cash inflows occur evenly throughout the year, what is the estimated payback period for this investment (round your answer to two decimal points)?
2. What is the estimated book (accounting) rate of return (ARR) based on initial investment (rounded)?
3. What is the estimated book (accounting) rate of return (ARR) based on average investment, where "average investment" is defined as a simple average of the beginning-of-project book value and the end-of-project book value of the asset?

Question

Nelson Inc. is considering the purchase of a $600,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Nelson can sell all that it could manufacture for the next ten years, the government exempts taxes on profits from new investments. This legislation will most likely remain in effect in the foreseeable future. The equipment is expected to have ten years of useful life with no salvage value. The firm uses the double-declining-balance depreciation method and switches to the straight-line depreciation method in the last four years of the asset's 10-year life. Nelson uses a rate of 10% in evaluating its capital investments. The net cash inflows are expected to be as follows:  Required:
1. Under the assumption that cash inflows occur evenly throughout the year, what is the estimated payback period for this investment (round your answer to two decimal points)?
2. What is the estimated book (accounting) rate of return (ARR) based on initial investment (rounded)?
3. What is the estimated book (accounting) rate of return (ARR) based on average investment, where "average investment" is defined as a simple average of the beginning-of-project book value and the end-of-project book value of the asset?

Quizplus · Accepted Answer

The Answer of Nelson Inc. is considering the purchase of a $600,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Nelson can sell all that it could manufacture for the next ten years, the government exempts taxes on profits from new investments. This legislation will most likely remain in effect in the foreseeable future. The equipment is expected to have ten years of useful life with no salvage value. The firm uses the double-declining-balance depreciation method and switches to the straight-line depreciation method in the last four years of the asset's 10-year life. Nelson uses a rate of 10% in evaluating its capital investments. The net cash inflows are expected to be as follows:  Required:
1. Under the assumption that cash inflows occur evenly throughout the year, what is the estimated payback period for this investment (round your answer to two decimal points)?
2. What is the estimated book (accounting) rate of return (ARR) based on initial investment (rounded)?
3. What is the estimated book (accounting) rate of return (ARR) based on average investment, where "average investment" is defined as a simple average of the beginning-of-project book value and the end-of-project book value of the asset?