Woods Company is considering the purchase of some equipment. The initial investment will be $500,000. The annual savings in cash operating costs are $80,000. The estimated useful life of the equipment will be 8 years, at which point it will have a $20,000 terminal salvage value. The company uses straight-line depreciation. The company has a minimum desired rate of return of 14%.
Required: (1) The Payback Period.
(2) The Net Present Value.
(3) The Accounting Rate of Return.
(4) Indicate whether Woods Company should purchase the equipment. Explain
why.