Sales volume reaches the maximum capacity, Financial Accounting

Sales volume reaches the maximum capacity of the new machine in Year 4.

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The positive NPV point to that the investment in Machine Two is financially acceptable although the NPV is so small that there is likely to be a significant possibility of a negative NPV.


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Writing down allowances as well as tax benefits

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Total taxable cash flow = (48100 + 68214 + 90040 + 113234) = $319588

Total depreciation = $215000

Total accounting profit = 319588 - 215000 = $104588

Average annual accounting profit = 104588/4 = $26147

Average investment = 215000/2 = $107500

Return on capital employed = 100 × 26147/107500 = 24·3%

ROCE of 24·3% is somewhat less than the target ROCE of 25% indicating that buying the machine isn't acceptable with respect to this criterion. though evaluation using the net present value approach is preferred for investment advice.

Posted Date: 7/11/2013 6:54:56 AM | Location : United States

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