Acc350 Managerial Accounting: P26-38 Davis Consulting is considering purchasing two different types
Acc350 Managerial Accounting P26-38 Using payback, ARR, NPV, and IRR to make capital investment decisions This problem continues the Davis Consulting, Inc. situation from Problem P25-34 of Chapter 25. Davis Consulting is considering purchasing two different types of servers. Server A will generate net cash inflows of $25,000 per year and have a zero residual value. Server As estimated useful life is three years and it costs $40,000. Server B will generate net cash inflows of $25,000 in year 1, $11,000 in year 2, and $4,000 in year 3. Server B has a $4,000 residual value and an estimated life of three years. Server B also costs $40,000. Daviss required rate of return is 14%.
Requirements 1. Calculate payback, accounting rate of return, net present value, and internal rate of return for both server investments. Use Microsoft Excel to calculate NPV and IRR. 2. Assuming capital rationing applies, which server should Davis invest in?