Question

AJ Manufacturing is considering buying a new conveyor belt system. Below are the expected net annual cash flows from the first 11 years of operations.

Year 1: 157,250

Year 2: 160,380

Year 3: 165,440

Year 4: 170,500

Year 5: 200,375

Year 6: 225,370

Year 7: 300,470

Year 8: 310,500

Year 9: 315,250

Year 10: 320,350

Year 11: 345, 220

There would be an initial investment of $1,250,000 to purchase the system. It would also require assembly and set up fees of $225,000. The new equipment will generate annual revenue of $250,000, with annual expenses including depreciation of $100,000.

At the end of 11 years the equipment will have a salvage value of $220,000. The company requires an annual rate of return of 25%.

Required:

a) Calculate the pay back period

b) Calculate the annual rate of return and comment whether the company should move forward

Answer 1

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