Answer:
(A) Payback period for the machine= 3.5 years
(B) Simple rate of return for the machine= 87.5%
Explanation:
Alesu corporation is considering purchasing a machine that would cost $283,850
The useful life is 5 years
The machine would reduce cash operating costs by $81,100 per year
The salvage value is $107,100
(A) The payback period for the machine can be calculated as follows
= cost/amount of cash flow
= 283,850/81,100
= 3.5 years
(B) The simple rate of return for the machine can be calculated as follows
First we calculate the depreciation expense
= 283,850-107,100/5
= 176,750/5
= 35,350
Annual incremental income= cost savings -depreciation expenses
= 283,850-35,350
= 248,500
Simple rate of return = annual incremental income/cost × 100
= 248,500/283,850 × 100
= 0.875 × 100
= 87.5%
