Accrual Return on Investment Versus Cash Flows

question 32

Essay

Accrual return on investment versus cash flows
The Flinders Island Airways Pty Ltd is planning a project that is expected to last for six years. During that time, the project is expected to generate net cash inflows of $75 000 per annum.
The project will require the purchase of a machine for $280 000. This new machine is expected to have a salvage value of $10 000 at the end of six years. In addition to its annual operating costs, the machine will require an overhaul costing $50 000 at the end of the fourth year. The company presently has a minimum desired rate of return of 12 per cent. Based on this information, the accountant prepared the following analysis:
Therefore, the accountant recommends that the project be rejected, as it does not meet the company's minimum desired rate of return.
i. What criticism(s) would you make of the accountant's evaluation of the project?

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