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(Ignore income taxes in this problem.) Alesi Corporation is considering purchasing a machine that would cost $907,280 and have a useful life of 15 years. The machine would reduce cash operating costs by $103,100 per year. The machine would have a salvage value of $107,320 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 the nearest whole dollar and your final answer to 2 decimal places.)

Respuesta :

TomShelby

Answer:

payback period for the macine 8.8 years

simple annual rate of return: 5.48%

Explanation:

payback period:

cost / cashflow per year

907,280  /  103,100 = 8.80

simple rate of return:

we calcualte the net incremental in our income that considers the depreciation of the machien as a reduction to the cost savings.

cost savings 103,100

depreciation expense:

(907,280 - 107,320) / 15 = 53.330,66

annual incremental income: 49.769,3

49,769.33 / 907,280 = 0,0548555 = 5.48%

a. The payback period for the machine is  8.8 years.

b. The simple annual rate of return is 5.48%.

Calculation of the payback period and simple rate of return:

a. The payback period is

= cost / cashflow per year

= 907,280  /  103,100

= 8.80

b. The simple annual rate of return should be

Since the cost savings is  103,100

Now depreciation expense:

= (907,280 - 107,320) / 15

= 53.330.66

So,

annual incremental income is

= $103,100 - $53,330.66

= 49.769,3

Now the simple rate of return is

= $49,769.33 / $907,280

= 0,0548555

= 5.48%

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