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Question: question 3 safe home ltd is firm specialising in the...

Question details

XYZ Business is firm specialising in the development and installation of electronic security systems. The company is considering the purchase of testing equipment that would be used in the development and testing of its security systems. The equipment would cost $158,400 and would have no residual value at the end of its 5-year life.

The firm’s accountant projects revenue and expenses with the operation of the equipment that are equal to the cash inflows and cash outflows associated with it, except for depreciation. A summary of the cash flows expected from the equipment is as follows:

 

Year

Revenue

Expenses (Excluding Depreciation)

1

125,500

83,520

2

138,240

88,560

3

147,240

88,560

4

156,240

88,560

5

165,240

88,560

 

The company’s cost of capital is 12% and the minimum ARR that is acceptable is 30%.

Required: 

(a) Calculate the Accounting Rate of Return (ARR) for the testing equipment, showing your answer to one decimal place.                                                                                                   

 

(b) Calculate the Net Present Value (NPV) of the testing equipment.                                          

 

(c) Should the testing equipment be purchased? Explain why or why not.       

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