Question

Problem 13-29A (Part Level Submission)

Magna Inc. is considering modernizing its production facility by investing in new equipment and selling the old equipment. The following information has been collected on this investment.

Old Equipment				New Equipment
Cost		$80,960		Cost		$38,400
Accumulated depreciation		$42,000		Estimated useful life		8 years
Remaining life		8 years		Salvage value in 8 years		$4,512
Current salvage value		$10,300		Annual cash operating costs		$29,800
Salvage value in 8 years		$0
Annual cash operating costs		$35,000

Depreciation is $10,120 per year for the old equipment. The straight-line depreciation method would be used for the new equipment over an eight-year period with salvage value $4,512.

Cash payback period

5.404

years

Calculate the annual rate of return. (Round answer to 2 decimal places, e.g. 15.25%.)

Annual rate of return

%

Answer 1

Ans:1. Cash Payback Period= Cash outflow/Cash Benefit

=> {38,400-10,300}/(35,000-29,800}

=> 28,100/5,200

=> 5.40 Years

Annual Rate of Return= Annual Benefit/ Initial Investment*100

For Old Equipment

=> 10,120/80,960*100

=> 12.50%

Annual Benefit for New Equipment=Annual Depreciation claim+Savings in annual Cash operating expense

=> 38,400-4,512)/8+{35,000-29,800}

=> 4,236+5,200

=> 9,436

For New Equipment Annual Rate of return= 9,436/38,400*100

=> 24.57%