(Ignore income taxes in this problem.) Brewer Company is considering purchasing

Question

(Ignore income taxes in this problem.) Brewer Company is considering purchasing a machine that would cost $615,900 and have a useful life of 8 years. The machine would reduce cash operating costs by $102,708 per year. The machine would have a salvage value of $123,920 at the end of the project.

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

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

I need to know how to compute these problems???????????

Explanation / Answer

Hi,

Please find the answer as follows:

Part 1:

Payback Period

Total Investment = 615900

Annual Cost Savings = 102708

= 615900/102708 = 5.99

Therefore, payback period is 5.99 years.

Part 2

You can use excel in the calculation and use IRR to calculate the rate of return or use the below mentioned equation:

0 = -615900 + 102708/(1+r)^1 + 102708/(1+r)^2 + 102708/(1+r)^3 + 102708/(1+r)^4 + 102708/(1+r)^5 + 102708/(1+r)^6 + 102708/(1+r)^7 + 102708/(1+r)^8 + 123920/(1+r)^8

Simple rate of return = 9.59%

Thanks.

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