Question

Jark Corporation has invested in a machine that cost $75,000, that has a useful life of four years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of two years. Given these data, the simple rate of return on the machine is closest to (Ignore income taxes.): (Round your answer to 1 decimal place.)

Garrison 16e Rechecks 2017-11-11

Multiple Choice

a. 21.4%

b. 22.5%

c. 25.0%

d. 75.0%

Answer 1

Ans. Option C 25.0%

Working notes:

*Calculation of annual cash inflow:

Annual cash inflow = Cost of machine / Payback period

= $75,000 / 2

= $37,500

*Calculation of depreciation expense:

Depreciation expense = (Cost of machine - Salvage value) / Useful life

= ($75,000 - 0) / 4

= $75,000 / 4

= $18,750

*Calculation of net income:

Net income = Annual cash inflow - Depreciation expense

= $37,500 - $18,750

= $18,750

*Calculation of simple rate of return:

Simple rate of return = Net income / Cost of machine * 100

= $18,750 / $75,000 * 100

= 25%