Financial Analysis: Miami Company's Machine Purchase Decision Report

This report provides a financial analysis of Miami Company's decision to purchase a new machine. The analysis utilizes key capital budgeting techniques, including the accounting rate of return (ARR), payback period, and net present value (NPV), to evaluate the investment's feasibility. The report includes calculations for each method, such as the ARR of 45.38%, a payback period of 1.81 years, and a positive NPV of $75,558.44. These results suggest the project is financially sound. Furthermore, the report addresses the environmental implications of the machine purchase, highlighting the obsolescence of the old machine. The data used for the analysis includes initial investment costs, annual sales, expenses, and the impact of the new machine on production and profit margins, as outlined in the provided assignment brief. The analysis concludes that the project is likely beneficial for the company. The report references relevant academic literature to support its findings.

Running Head: ACCOUNTING
ACCOUNTING

Running Head: ACCOUNTING
Table of Contents
A......................................................................................................................................................3
B.......................................................................................................................................................3
C.......................................................................................................................................................3
D......................................................................................................................................................3
E.......................................................................................................................................................4
References........................................................................................................................................5

Running Head: ACCOUNTING
A
Accounting rate of return
Average net profit $ 29,500.00 45.38%
Average investment $ 65,000.00
B
Payback period
Initial investment $ 130,000.00
Net income $ 118,000.00
Depreciation $ 130,000.00
Loss of disposal $ 40,000.00 1.81 times
C
Net Present value Amount Factor Present value
Capital investment $ (130,000.00) 1.000 $ (130,000.00)
Net annual cash flows $ 87,000.00 2.855 $ 205558.44
Net Present value $ 75558.44
(118000+130000+40000)/4
D
Capital budgeting techniques are the techniques that are used by the business to identify
whether the project shall be accepted or not. The three techniques that have been used in this
case are the net present value, accounting rate of return and the payback period. Below are the
tables that can provide the clear justification of why this proposal is suitable for the business in
near future (Bora, 2015).
From the above analysis it can be stated that the net income has been $118000 over the
period of 4 years. As per the results, the accounting rate of return is 45.38% which is on the
positive outlook and this also implies that, returns will be greater if the company invests in the
business. The payback period of 1.81 years meets the stipulated requirement of time within three

Running Head: ACCOUNTING
years. The net present value of the project is also positive at $118383.12 and this indicates that
the company will be beneficial in investing its funds in the project. While meeting all the criteria
it can be safely said that project will be feasible (Damodaran, 2016).
E
The environmental issue while running the old machine is that it is obsolete in nature
after a particular point of time and the machine will not be able to produce the results with
accuracy and company might have to face losses (Damodaran, 2016).

Running Head: ACCOUNTING
References
Bora, B., (2015). Comparison between net present value and internal rate of return. International
Journal of Research in Finance and Marketing, 5(12), 61-71.
Damodaran, A., (2016). Damodaran on valuation: security analysis for investment and
corporate finance (Vol. 324). John Wiley & Sons.