Question

Ramson Corporation is considering purchasing a machine that would cost $454,140 and have a useful life...

Ramson Corporation is considering purchasing a machine that would cost $454,140 and have a useful life of 8 years. The machine would reduce cash operating costs by $84,100 per year. The machine would have a salvage value of $107,130 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.)

b. Compute the simple rate of return for the machine. (Round your intermediate calculations to nearest whole dollar and your final answer to 2 decimal places.)

a. Payback period years
b. Simple rate of return %
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Homework Answers

Answer #1

Part a - Payback Period

Payback period is the length of time within which initial investment is returned back to the company.

Payback period = Initial Investment / Annual saving

= $454,140 / 84,100

= 5.4 years

Simple Rate of Return (based on initial investment) = Annual Saving / Initial Investment x 100

= $84,100 / 454,140 x 100

= 18.52%

Simple Rate of Return (based on Average Investment) = Annual Saving / Average Investment x 100

Average Investment = (Intial Value 454,140 + Salvage Value 107,130) / 2 = $280,635

Simple Rate of Return (based on Average Investment) = Annual Saving 84,100 / Average Investment 280,635 x 100

= 29.97%

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