Capital investment decisions

Planning for capital investments is an important function of management. You are responsible for considering purchasing new equipment for $450,000. It is expected that the equipment will produce net annual cash flows of $55,000 over its 10-year useful life. Annual depreciation will be $45,000. Compute the cash payback period. (1) Explain the pros and cons of using this method to evaluate a capital expenditure (10 points) and (2) show all computations required to arrive at the correct solution. (15 points).

Allgood Inc. has fixed costs of $480,000. It has a unit selling price of $6, unit variable cost of $4.50, and a target net income of $1,500,000. Compute the required sales in units to achieve its target net income. (1) Explain how the analysis is to be performed (10 points) and (2) Show all computations required to arrive at the correct answer.

Financial statement analysis is used by investors, creditors and managers of business to evaluate the operation and health of the business. This information is in part the basis for decision making. (1) Identify ratios used to evaluate the profitability of a company (10 points) and (2) provide an example of how the results of this analysis could be used to make business decisions.