Question

Ramson Corporation is considering purchasing a machine that would cost $283,850 and have a useful life...

Ramson Corporation is considering purchasing a machine that would cost $283,850 and have a useful life of 5 years. The machine would reduce cash operating costs by $81,100 per year. The machine would have a salvage value of $107,100 at the end of the project. (Ignore income taxes.)

Required:

a. Compute the payback period for the machine. (Round your answer to 2 decimal places.)

b. Compute the simple rate of return for the machine. (Round your intermediate calculations to the nearest whole dollar and your final answer to 2 decimal places.)

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Answer #1
1) payback period
initial investment/annual net cash flow
283,850/81100
3.5 years
2) simple rate of return
Annual incremental net operating income/initial investment
45,750/283850
16.12%
Annual incremental cost savings 81,100
annual depreciation (283850-107100)/5= 35350
Annual incremental net operating income 45,750
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