Valprado Industries Is Thinking of Purchasing a Machine That Will

question 68

Essay

Valprado Industries is thinking of purchasing a machine that will produce plastic kitchenware. The machine would be used for five years, would cost $35,000, would have a $5,000 residual value, and would increase annual net cash inflows by $8,800. Valprado uses the straight-line method of depreciation. Using the above facts and the present value factors below, calculate (a) the payback period (if necessary, round off and carry to one decimal place), (b) the accounting rate of return (if necessary, round off and carry to one decimal place), and (c) the machine's net present value (use parentheses to indicate a negative net present value) based on a 12 percent minimum desired rate of return (if necessary, round to the nearest dollar).
$\begin{array}{ccc} & \begin{array}{c}\text { Present Value of } \mathbf{\$ 1} \\\text { at 12 Percent }\end{array} & \begin{array}{c}\text { Present Value of an } \\\text { Annuity of } \mathbf{\$ 1} \\\text { at } \mathbf{1 2} \text { Percent }\end{array} \\1 & .893 & .893 \\2 & .797 & 1.690 \\3 & .712 & 2.402 \\4 & .636 & 3.038 \\5 & .567 & 3.605\end{array}$

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Definitions:

GAAP

Generally Accepted Accounting Principles (GAAP) are a set of accounting standards and principles designed to ensure consistency in financial reporting.

Repetitive Basis

A method or process that is regularly repeated in a consistent manner over time, often used to describe routine transactions or operations.

Deferred Charge

An expenditure paid for in one accounting period but reported as an asset because it will provide benefits in future periods.

Sales Tax

A tax imposed by governments on the sale of goods and services, collected by the retailer at the point of sale.