J and B industries is debating whether or not to invest in new equipment to manu

Question

J and B industries is debating whether or not to invest in new equipment to manufacture a line of high quality luggage. The new equipment would cost $900,000, with an estimated four year life and no salvage value. The estimated (incremental) annual operating results with the new equipment are as follows:

Revenue from sales of new luggage line $975,000
Expenses other than depreciation $675,000
Depreciation (straight-line) $225,000
Increase in net income $75,000

Weighted average cost of capital 12%


All revenue from the new luggage line and all expenses (except deprication) will be received or paid in cash the same period as recognized for accounting purposes.

****Please compute the following for the proposed new luggage line:

1. Annual cash flow $______
2.Payback period (using annual cash flow) _____years
3. Return on investment (using net income) __%

Explanation / Answer

Hi, If you like my answer rate me first...that way only I can earn points. Thanks 1) Annual Cash flow = Net income + depreciation (since it is a non-cash expense) = $300000 2) Initial cost = $900000, so payback time = 900000/300000 = 3 years 3) Return on Investment = $75000/900000 = 8.33%

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