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