Question

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.

Answer 1

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