The management of Dewitz Corporation is considering a project that would require

Question

The management of Dewitz Corporation is considering a project that would require an initial investment of $72,000. No other cash outflows would be required. The present value of the cash inflows would be $85,680. The profitability index of the project is closest to:

(Ignore income taxes in this problem.) Brewer Company is considering purchasing a machine that would cost $578,100 and have a useful life of 8 years. The machine would reduce cash operating costs by $92,708 per year. The machine would have a salvage value of $116,020 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.)

(Ignore income taxes in this problem.) Brewer Company is considering purchasing a machine that would cost $578,100 and have a useful life of 8 years. The machine would reduce cash operating costs by $92,708 per year. The machine would have a salvage value of $116,020 at the end of the project.

Explanation / Answer

Hi,

Please find the answers as follows;

Part 1:

Profitability Index = NPV/Initial Investment = (85680 -72000)/72000 = .19

Part 2:

Payback Period = Initial Investment/Annual Cash Inflows = 578100/92708 = 6.24 Years

Simple Rate of Return = 92708/578100*100 = 16.04% (Details on Operating Income are not provided, hence assuming cost reduction as incremental operating income)

Thanks.

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