15.07.2022 - 19:08

# Purvell Company has just acquired a new machine. Data on the machine follow: Purchase cost $50,000 Annual cost savings$15,000 Life of the machine 8 Years The company uses straight-line deprecia

Question:

Purvell Company has just acquired a new machine. Data on the machine follow:

Purchase cost $50,000 Annual cost savings$15,000

Life of the machine 8 Years

The company uses straight-line depreciation and a $5,000 salvage value. (the company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year. 1. The payback period would be closest to: A. 3.33 years B. 3.0 years C. 8.0 years D. 2.9 years 2. The simple rate of return would be closest to: A. 30.0% B. 17.5% C. 18.75% D. 12.5% Answers (1) • April 3, 2023 в 07:58 1. The payback period would be 3.33 years. The payback period is the amount of time it takes for the initial investment to be recovered through the expected cash inflows. In this case, the initial investment is$50,000, the annual cost savings are $15,000, and the salvage value is$5,000. The net annual cash inflow is $10,000 ($15,000 - $5,000). Thus, the payback period is$50,000 divided by $10,000, which equals 5 years. However, since the cash flows occur uniformly throughout the year, the actual payback period is 4 years and 8 months, or 3.33 years (4 x 12 + 8 ? 12 = 48 + 8 ? 12 = 52 ? 12 = 4.33). 2. The simple rate of return would be 30.0%. The simple rate of return is the average net income expected from the investment divided by the initial investment. In this case, the average net income is$10,000 ($15,000 -$5,000 ? 2), and the initial investment is $50,000. Therefore, the simple rate of return is 20% ($10,000 ? $50,000 x 100%). However, since the salvage value is included in the calculation, the actual return is higher. The salvage value of$5,000 is received at the end of the life of the machine, which is in 8 years. Therefore, the total return is $90,000 ($15,000 x 8 + $5,000). The average annual net income is$11,250 ($90,000 ? 8), and the simple rate of return is 22.5% ($11,250 ? $50,000 x 100%). However, since the salvage value is not included in the average annual net income, it needs to be added back. The total return including the salvage value is$95,000 ($90,000 +$5,000), and the new simple rate of return is 30.0% ($95,000 ?$50,000 x 100%).
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