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:

Ethical Decision-Making

The method of assessing and selecting between options in a way that aligns with moral standards.

Stakeholders

Individuals or groups that have an interest or concern in the operations and decisions of a business or project.

Ethical Issue

A situation or problem that requires individuals or organizations to choose between alternatives that must be evaluated as right (ethical) or wrong (unethical).

Marketing Mix

A set of actionable marketing tools—product, price, place, and promotion—that a business uses to pursue its marketing objectives in the target market.