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Lakeside Inc. is considering replacing old production equipment with state-of-the-art technology that will allow production cost...

Lakeside Inc. is considering replacing old production equipment with state-of-the-art technology that will allow production cost savings of $10,000 per month. The new equipment will have a five-year life and cost $420,000, with an estimated salvage value of $30,000. Lakeside’s cost of capital is 8%. Lakeside Inc. uses a straight-line depreciation method. Required: Calculate the payback period and the accounting rate of return for the new production equipment. (Round your answers to 2 decimal places.)

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Answer #1
Payback Period:
Payback period = Initial Investment / Annual Cash Flow
= $420000 /120000
= $3.5 years
Accounting Rate Of Return (ARR):
Annual Depreciaiton =Cost - Salvage Value / Life of Asset
= ( $420000 -30000 ) /5 years
= $ 78000 per year
Annual Net Income = Annual Cash Flow - Depreciation
= $120000-78000
= $42000
Average Investment = (Intial Investment + Salvage Value )/2
= ( $420000 + 30000 ) / 2
= $ 225000
Accounting Rate Of Return = Net Income / Average Investment
= $42000 /225000
= $18.67 %
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