Marc Corporation wants to purchase a new machine for $400,000. Management predicts that the machine can produce sales of $275,000 each year for 5 years. Expenses are expected to include direct materials, direct labor, and factory overhead (excluding depreciation) totaling $80,000 per year. The company uses MACRS for depreciation. The machine is considered 3-year property and is not expected to have any significant residual value at the end of its useful life. The company is subject to a 40% combined income tax rate, t. Management uses a 10% weighted-average cost of capital (WACC) to evaluate proposed capital expenditures. A partial MACRS depreciation table is reproduced below.

\begin{array} { | l | c | c | } \hline \text { Year } & \text { 3-year property } & \text { 5-year property } \\\hline 1 & 33.33 & 20.00 \\\hline 2 & 44.45 & 32.00 \\\hline 3 & 14.81 & 19.20 \\\hline 4 & 7.41 & 11.52 \\\hline 5 & & 11.52 \\\hline 6 & & 5.76 \\\hline\end{array}

Required:
1. What is the payback period for the new machine (rounded to the nearest tenth of a year)? Assume for purposes of this calculation that the cash inflows occur evenly throughout the year.
2. What is the accounting (book) rate of return (ARR) (rounded to two decimal places) based on the initial investment and on average after-tax income over the five-year period?
3. What is the accounting (book) rate of return (ARR) (rounded to two decimal places), based on the average investment, where the latter is determined as a simple average of beginning-of-project and end-of-project book value of the asset?

In Capital Budgeting, the Accounting Rate of Return (ARR) Decision

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