Question

Carper Company is considering a capital investment of $390,000 in additional productive facilities. The new machinery is expected to have useful life of 6 years with no salvage value. Depreciation is by the straight-line method. During the life of the investment, annual net income and net annual cash flows are expected to be $20,000 and $85,000, respectively. Carper has an 8% cost of capital rate, which is the required rate of return on the investment. Instructions (Round to two decimals.)

Answer 1

Answer:

(1) Payback period is 4.588 years or 4 years and 215 days

(2) 5.13%

Explanation:

(1)

Payback period is the time period in which Initial Investment made in the project is recovered in the form of cash inflows.

Payback period = Initial Investment / Annual net cash flow

Payback period = $390,000 / $85,000 = 4.588 years = 4 years and 215 days

(2)

As per given data

Net Income = $20,000

Initial Investment = $390,000

Annual rate of return is the ration of net income to the investment made in the project.

Annual rate of return = Annual net Income / Initial Investment  

Annual rate of return = ($20,000 / $390,000) x 100 = 5.13%

Answer 2

Answer:

1. 4.59

2. 5.13%

Explanation:

(1) the cash payback period

Pay back period = Capital investment / Annual net annual cash flows = $390,000 / $85,000 = 4.59, or 4 years and  (0.58823529411765 * 12 months) = 4 years and 7 months.

(2) The annual rate of return on the proposed capital expenditure

Annual rate of return = Annual net income / Capital investment = $20,000 / $390,000 = 0.0513, or 5.13%.