Fritz Company Is Planning to Acquire a $250,000 Machine to Improve

question 112

Essay

Fritz Company is planning to acquire a $250,000 machine to improve manufacturing efficiencies, thereby reducing annual cash operating costs (before taxes) by a projected $80,000 for each of the next five years. The company requires a minimum rate of return of 8% on all capital investments. The machine will be depreciated using straight-line method over a five-year period with no salvage value at the end of five years. Fritz is subject to a combined 40% income tax rate.
Required:
1. What is the machine's payback period, in years (rounded to one decimal place, e.g., 4.2483 years = 4.2 years), under the assumption that cash flows occur evenly throughout the year?
2. What is the accounting (book) rate of return (ARR), based on the initial investment amount (rounded to one decimal place, that is, rounded to the nearest one-tenth of a percent, e.g., 12.342% = 12.3%)?

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Definitions:

Price Competition

A market situation where businesses attempt to outdo competitors by offering goods or services at lower prices.

Product Differentiation

The method of differentiating a product or service from competitors, aiming to make it more appealing to a specific target audience.

Low Entry Barriers

Conditions that make it easy for new competitors to enter an industry, typically leading to increased competition.

Collusion

A non-competitive, secret agreement between rivals to limit competition, set prices, or control market shares.