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:

Standard Deviation

Standard deviation is a statistical measure that quantifies the amount of variation or dispersion of a set of data values, commonly used in finance to measure the volatility or risk of an investment.

Returns

The profit or loss derived from an investment over a certain period of time, often expressed as a percentage.

Expected Return

The weighted average of all possible returns from an investment, with each outcome's weight being its probability of occurrence.