Question

Jason corporation has invested in a machine that cost $75,000, that has a useful life of fifteen years, and that has no salvage value at the end of its useful life. the machine is being depreciated by the straight-line method, based on its useful life. it will have a payback period of six years. given these data, the simple rate of return on the machine is closest to: (ignore income taxes in this problem.)

Answer 1

We can solve this problem by first calculating the annual net cash inflow. This can be solved by remembering that:

Payback period = Initial investment / Annual net cash inflow

6 years = $75,000 / Annual net cash inflow Therefore, Annual net cash inflow = $12,500   Next, we calculate for the cost. The cost we will consider here is the depreciation value of the machine. Annual depreciation = $75,000 / 15 years = $5,000   Therefore the annual net operating income is: Annual net operating income = $12,500 - $5,000 = $7,500   Simple rate of return is calculated by: Simple rate of return = Annual net operating income / Initial investment Simple rate of return = $7,500 / $75,000 = 0.1 = 10%