Nelson Inc Required:
1

Essay

Nelson Inc. is considering the purchase of a $600,000 machine to manufacture a specialty tap for electrical equipment. The tap is in high demand and Nelson can sell all that it can manufacture each year for the next 10 years. To spur economic growth, the government currently exempts taxes on profits from investments like the equipment under consideration. This legislation will most likely remain in effect in the foreseeable future. The equipment is expected to have 10 years of useful life with no salvage value. The firm uses the double-declining-balance (DDB) depreciation method and switches to the straight-line depreciation method in the last four years of the asset's 10-year life. Nelson uses a rate of 10% (weighted-average cost of capital) in evaluating its capital investments. The net cash inflows are expected to be as follows: $$\begin{array} { | c | r | } \hline \text { Year } & \begin{array} { c } \text { Cash } \\\text { Inflow }\end{array} \\\hline 1 & \$ 40,000 \\\hline 2 & 70,000 \\\hline 3 & 100,000 \\\hline 4 & 170,000 \\\hline 5 & 200,000 \\\hline 6 & 250,000 \\\hline 7 & 230,000 \\\hline 8 & 200,000 \\\hline 9 & 100,000 \\\hline 10 & 40,000 \\\hline\end{array}$$ Required:
1. Under the assumption that cash inflows occur evenly throughout the year, what is the estimated payback period for this investment (rounded to two decimal places, e.g., 4.781 years = 4.78 years)?
2. What is the estimated accounting (book) rate of return (ARR) based on initial investment (rounded to two decimal places, e.g., 12.348% = 12.35%)?
3. What is the estimated accounting (book) rate of return (ARR) based on average investment, where "average investment" is defined as a simple average of the beginning-of-project book value and the end-of-project book value of the asset? Round your answer to two decimal places.