Response to the following problem:
Zippi Co. manufactures motorized scooters in Oakland, California. The company is considering an expansion. The plan calls for a construction cost of $5,200,000. The expansion will generate annual net cash inflows of $675,000 for 10 years. Engineers estimate that the new facilities will remain useful for 10 years and have no residual value. The company uses straight-line depreciation, and its stockholders demand an annual return of 10% on investments of this nature.
Required:
1. Compute the payback period, the accounting rate of return, and the net present value of this investment.
2. Make a recommendation whether the company should invest in this project.