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Bargo manufacturers is considering the acquisition of a new machine. The machine has a purchase...

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Accounting

Bargo manufacturers is considering the acquisition of a new machine. The machine has a purchase cost of $400,000 and it will be disposed of at a salvage value of $25,000 at the end of its 5- year life. Installation is expected to cost $20,000. To support the expanded production capacity, the company will need to increase its networking capital by $10,000. The cost of capital is 14%. Acquisition of the machine is expected to result in the following net cash inflows:

Year $ 1 300,000 2 350,000 3 550,000 4 500,000 5 400,000

Required: A. Compute the initial and terminal cash flows of the project. B. Bargo rejects projects if the payback period is more than 50% of the expected project duration. Using this criterion, should the project be accepted?

C. Bargo uses the Net present Value as the basis of the final decision. Using this criterion, should the firm acquire the machine? D. Explain TWO (2) reason that the firm would not rely exclusively one the payback method.

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