The Flat Tile Company Is Contemplating an Investment in a New

question 23

Essay

The Flat Tile Company is contemplating an investment in a new 2500 pound per square inch press. The estimate of the project's price is $250,000. The press will have a life of 8 years and have a salvage value of $25,000. Annual net cash flows from the eight years of operations are expected to be $45,000. If Flat's applicable discount rate is 12%, is the project acceptable? Why or why not?

---

Definitions:

Straight-Line Method

A method of calculating depreciation of an asset which assumes the asset will lose an equal amount of value each year over its useful life.

Diminishing Value

A method of depreciation where an asset loses value at a decreasing rate over time, reflecting its declining usefulness or productivity.

Accounting Rate of Return

A financial ratio that measures the return on investment from a project based on its net income.

Time Value of Money

The concept that money available today is worth more than the same amount in the future due to its earning capacity.