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The Banner Company (BC) has recently carried out research which indicates that with an investment in a machine that would cost $300,000; they would be able to provide to improve their production processes. The use of the machine would take place throughout the next six years. It is estimated that the machine could be disposed of, for $30,000.

Zhao, the CEO wants an evaluation of this potential investment. Li, the Finance Manager indicates the opportunity cost of finance for investments is 15% while Ram, the Management Accountant indicates that the minimum Payback Period for investments should be 3 years.

Cash Inflows and Outflows from the machine investment would be expected to be as follows:

Time $000ImmediatelyCost of machine(300)1 years timeOperating profit before depreciation502 years timeOperating profit before depreciation903 years time Operating profit before depreciation1404 years timeOperating profit before depreciation1505 years timeOperating profit before depreciation806 years timeOperating profit before depreciation606 years timeDisposal proceeds from the machine30

Show all your workings clearly for this section of the paper and round relevant final calculations to two decimal places.

Required:

1. What is the Accounting Rate of Return (ARR) of buying the machine?
2. What is the payback period for Banner Company if they were to invest in the purchase of the machine?
3. Determine the NPV of the machine investment project for Banner Company. Assume a 15 percent opportunity cost of finance. (Use the Present Value table provided).
4. What is the internal rate of return (IRR) of the machine investment project for Banner Company? (Use the Present Value table provided. Hint: Trial and Error. You already know the NPV of this project at 15%. Try either 20 % or 25%. Round your calculations to two decimal places.)
5. Using your answers from (a), (b), (c) and (d), explain whether or not Banner Company should proceed with the machine investment project.

Present value of 1 , that is, (1+r)1t where: r= discount rate n= number of periods until payment. Discount rate (r) Present value table continued Period (n)16%17%18%19%20%21%22%23%24%25%26%27%28%29%30% 0.8620.8560.8470.8400.8330.8260.8200.8130.8060.8000.7940.7870.7810.7750.769 20.7430.7310.7180.7060.6940.6830.6720.6610.6500.6400.6300.6200.6100.6010.592 30.6410.6240.6090.5930.5790.5640.5510.5370.5240.5120.5000.4880.4770.4660.455 40.5520.5340.5160.4990.4820.4670.4510.4370.4230.4100.3970.3840.3730.3610.350 50.4760.4560.4370.4190.4020.3860.3700.3550.3410.3280.3150.3030.2910.2800.289 70.3540.3330.3140.2960.2790.2630.2490.2350.2220.2100.1980.1880.1780.1680.159 100.2270.2080.1910.1760.1620.1800.1670.1550.1440.1340.1250.1160.1080.1010.094 120.1680.1520.1370.1240.1120.1020.0920.0830.0760.0690.0620.0570.0520.0470.043 150.1080.0950.0840.0740.0650.0570.0510.0450.0400.0350.0310.0280.0250.0220.020 170.0800.0690.0600.0520.0450.0390.0340.0300.0260.0230.0200.0170.0150.0130.012 180.0690.0590.0510.0440.0380.0320.0280.0240.0210.0180.0160.0140.0120.0100.009 200.0510.0430.0370.0310.0260.0220.0190.0160.0140.0120.0120.0110.0090.0060.007

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