Eco Wet, Inc., a manufacturer of gears for lawn sprinklers, is thinking about ad

Question

Eco Wet, Inc., a manufacturer of gears for lawn sprinklers, is thinking about adding a new fully automated machine. This machine can produce gears that the company now produces on its third shift. The machine has an estimated useful life of ten years and will cost $500,000. The residual value of the new machine is $50,000. Gross cash revenue from the machine will be about $420,000 per year, and related operating expenses, including depreciation, should total $400,000. Depreciation is estimated to be $80,000 annually. Management has decided that only capital investments that yield at least an 8 percent return will be accepted. Using the accounting rate-of-return method, decide whether the company should invest in the machine.

Explanation / Answer

ARR=Incremental revenue-Incremental expenses(including dep)/Intial investment 420000-400000/500000*100 20000/500000*100=4% So it should not be invested

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