Question

Dobson Corp. is considering the purchase of a new piece of
equipment. The cost savings from the equipment would result in an
annual increase in net income of $57,000. The equipment will have
an initial cost of $502,000 and have an seven year life. There is
no salvage value of the equipment. The hurdle rate is 11%. Ignore
income taxes.

**a.** Calculate accounting rate of return.
**(Round your answer to 2 decimal places.)**

**b.** Calculate payback period. **(Round your
answer to one decimal place.)**

Answer #1

**given that**

**net return (during the period) = $ 57000**

**cost of equipment = $ 502000**

**estimated life of an equipment = 7 years**

**a) calclate
accounting rate return :**

accounting rate return = net return / cost of
equipment |

**= (57000 / 502000) * 100**

**= 11.35 % (rounded off)**

**the accounting rate return is 11.35 %**

**b) calculate
payback period :**

payback period = cost of equipment / annual net cash
flow |

**annual net cash flow = net return + (cost of equipment /
estimated life of equipment)**

**= 57000 + (502000 / 7)**

**= 57000 + 71714**

**annual net cash flow = 128714**

payback period = cost of equipment / annual net cash
flow |

**payback period = 502000 / 128714**

**= 3.9 years**

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