Question

# Blue Marlin Company is considering the purchase of new equipment for its factory. It will cost...

Blue Marlin Company is considering the purchase of new equipment for its factory. It will cost \$242,000 and have a \$48,400 salvage value in five years. The annual net income from the equipment is expected to be \$26,620, and depreciation is \$38,720 per year.

Calculate Blue Marlin’s accounting rate of return and payback period for the equipment.

Blue Marlin’s accounting rate of return and payback period for the equipment is as follows:

1)Accounting rate of return = Net Income / Average Investment*100

Average Investment = (Cost + Salvage Value)/2

= (\$242,000 + \$48,400)/2

= \$290,400/2

= \$145,200

Accounting rate of return  = \$26,620/ \$145,200*100

= 18.33%

Accounting rate of return is 18.33%

2) Payback Period = Initial Investment/ Annual Cash Inflow

Annual Cash Inflow = Net Income + Depreciation

= \$26,620 + \$38,720

= \$65,340

Payback Period = \$242,000 / \$65,340

= 3.70 years