Question

(Ignore income taxes in this problem.) Alesi Corporation is considering purchasing a machine that would cost $283,850 and have a useful life of 5 years. The machine would reduce cash operating costs by $81,100 per year. The machine would have a salvage value of $107,100 at the end of the project. (Assume the company uses straight-line depreciation.) Required: a. Compute the payback period for the machine. (Round your answer to 2 decimal places.) b. Compute the simple rate of return for the machine. (Round your intermediate answers to nearest whole dollar and your final answer to 2 decimal places.)

Answer 1

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%