(Answered): The CarCare Garage is considering an investment in a new tune-up computer. The cost of the computer is $48,000. A cost analyst has calculated the dis…

The CarCare Garage is considering an investment in a new tune-up computer. The cost of the computer is $48,000. A cost analyst has calculated the discounted present value of the expected cash flows from the computer to be $52,650, based on the firm’s cost of capital of 12%. What is the expected return on investment of the machine, relative to 12%? Explain your answer. The payback period of the investment in the machine is expected to be 4.25 years. How much weight should this measurement carry in the decision about whether or not to invest in the machine? Explain your answer.

How do non-time-value-of-money measures like payback period compare with time-value-of-money measures like NPV & IRR in decision making regarding capital projects?

Also, if there was a considerable degree of risk as to the likely future cash flows (such as because of competition hurting future sales volume) should the firm consider using a different discount factor than its historical 12% cost of capital? Why or why not?

Expert Answer

Net Present Value

Present value of Expected cash Inflow at 12%

52,650

Less: Initial Outflow

48,000

Net Present Value

4,650

It is one of the technique to know that at desired rate of interest is it viable to start the project

If NPV>0, then project is viable should be accepted otherwise reject the project.

Expected Returnon investment is calculated using return or gain which is

(sum of discounted cash flows – Intial investment)/Intial Investment =(52650-48000)/48000

9.69%

The payback period is the number of years it takes to recover an initial investment.

The payback approach to investment selection has three serious shortcomings.

(1) payback calculation ignores the time value of money

(2) payback calculation ignores the profits and residual value that would be received beyond the maximum payback period

(3) the maximum acceptable payback period is set by the firm in a rather arbitrary manner without rigorous economic justification

Based on the above demerits in Non-time value of money like pay back period time value money like discounted cash flow more scientific and logical

If there is higher risk in future than the rate of discount should be higher than 12% so that proper care of such risk can be taken care of.

Top Quality and Well-Researched Papers

All ourbpapers are written from scratch. In fact, Clients who ask for paraphrasing services are highly discouraged. We have writers ready to craft any paper from scratch and deliver quality ahead of time.

Professional and Experienced Academic Writers

Our writers keeps you posted on your papers progress - providing you with paper outline/draft. You are also at liberty to communicate directly with your writer.

Free Unlimited Revisions

If you think we missed something, send your order for a free revision. You have 10 days to submit the order for review after you have received the final document. You can do this yourself after logging into your personal account or by contacting our support.

Prompt Delivery and 100% Money-Back-Guarantee

All papers are always delivered on time, in many cases quite ahead of time. In case we need more time to master your paper, we may contact you regarding the deadline extension. In case you cannot provide us with more time, a 100% refund is guaranteed.

Original & Confidential

We use several writing tools checks to ensure that all documents you receive are free from plagiarism. Our editors carefully review all quotations in the text. We also promise maximum confidentiality in all of our services.

24/7 Customer Support

Our support agents are available 24 hours a day 7 days a week and committed to providing you with the best customer experience. Get in touch whenever you need any assistance.

Try it now!

Calculate the price of your order

Type of paper needed:

Pages:

Academic level:

Total price:

$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.

Essays

Essay Writing Service

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.

Admissions

Admission Essays & Business Writing Help

An admission essay is an essay or other written statement by a candidate, often a potential student enrolling in a college, university, or graduate school. You can be rest assurred that through our service we will write the best admission essay for you.

Reviews

Editing Support

Our academic writers and editors make the necessary changes to your paper so that it is polished. We also format your document by correctly quoting the sources and creating reference lists in the formats APA, Harvard, MLA, Chicago / Turabian.

Reviews

Revision Support

If you think your paper could be improved, you can request a review. In this case, your paper will be checked by the writer or assigned to an editor. You can use this option as many times as you see fit. This is free because we want you to be completely satisfied with the service offered.