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:

Question

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Required:
1.Under the assumption that cash inflows occur evenly throughout the year,what is the estimated payback period for this investment is (round your answer to two decimal points)?
What is the estimated book (accounting)rate of return based on initial investment (rounded)?
What is the estimated book (accounting)rate of return 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?
Please see Feedback for answers.
 Feedback: 11ea6e70_bd09_ccfb_8f54_a50cb4d4fd08_TB1699_00 1.As can be seen from the accompanying schedule (above),the payback period occurs between years 5 and 6.If we assume that the cash inflows occur evenly throughout the year,then the estimated payback period = 5 + ($20,000/$250,000)= 5.08 years.
2.As seen in the above schedule,the total net income over the 10-year period = $800,000.Therefore,average net income per year = $800,000/10 years = $80,000.Initial investment = $600,000.Thus,ARR (based on initial investment)= $80,000/$600,000 = 13.33%
3.From 2 above,the average after-tax income per year = $80,000.Average investment in the project = (Book value,beginning of year 1 + Book value,end of year 0)/2 = ($600,000 + $0)/2 = $300,000.Thus,ARR = $80,000/$300,000 = 26.67%.Alternatively,given the way "average investment" is calculated,the answer here is twice the answer for the preceding question.