Question

Problem 13-140 Brewer Company is considering purchasing a machine... Brewer Company is considering purchasing a machine that would cost $537,600 and have a useful life of 9 years. The machine would reduce cash operating costs by $82,708 per year. The machine would have a salvage value of $107,520 at the end of the project. (Ignore income taxes.) Required: a. Compute the payback period for the machine. (Round your answer to 2 decimal places.) Payback period years b. Compute the simple rate of return for the machine. (Round your answer to 2 decimal places. Omit the "%" sign in your response.) Simple rate of return %

Answer 1

Answer:

Payback is 6.5 years

simple rate of return is 6.50%

Explanation:

The payback period for the investment is the number of years it would take the initial capital outlay of $537,600 to recoup itself,which is given by the formula below:

payback period=initial investment/annual incremental savings

initial investment is $537,600

annual incremental savings is $82,708

payback period=$537,600/$82,708= 6.5 years

Simple rate of return =annual savings-depreciation/initial investment

depreciation=($537,600-$107,520)/9=$47,786.67  

simple rate of return=($82,708-$47,786.67)/$537,600=6.50%