Said Company Is Considering the Purchase of a New Piece

question 71

Essay

Said Company is considering the purchase of a new piece of equipment for $45,000. The projected after-tax net income associated with this investment is $3,000 for each of the next three years. The company uses straight-line depreciation. The machine has a useful life of 3 years and no salvage value. Management of the company considers a 12% return on investment to be satisfactory.
Required:
1. What is the discounted payback period (in years) for this investment (rounded to one decimal place)? (The appropriate discount factors for 12% are as follows: Year 1 = 0.893; Year 2 = 0.797; and Year 3 = 0.712.)
2. What is the estimated net present value (NPV) of this proposed investment, rounded to the nearest whole number?

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Definitions:

Overhead Rate

A calculation used to allocate overhead costs to produced goods or services, typically based on a specific activity base such as labor hours or machine hours.

Predetermined Overhead Rate

A rate calculated at the beginning of the period by dividing estimated total overhead costs by an estimated allocation base, used to apply overhead costs to products or services.

Unused Capacity

The portion of a company's production potential that is not being utilized to manufacture goods or provide services.

Estimated Activity

An approximation of the amount of work or level of effort needed for a particular task or project.