London Corporation is considering investing $40,000 in equipment to produce a ne

Question

London Corporation is considering investing $40,000 in equipment to produce a new product.  The useful service life of the equipment is estimated to be ten years, with no salvage value. Straight-line depreciation is used.  The company estimates that production and sale of the new product will increase net income by $6,000 per year.

The payback period of this investment is:

A.  four years

B.  Five years

C.  Six years

D.  Over six years

The expected rate of return on average investment in this equipment is:

A.  15%

B.  30%

C.  7.5%

D.  Some other precentage.

Explanation / Answer

a) 4 Years

b) Some Other Percentage

0 1 2 3 4 5 6 7 8 9 10 Investment -40000 Incremental Net Income 6000 6000 6000 6000 6000 6000 6000 6000 6000 6000 Adding Back Depreciation 4000 4000 4000 4000 4000 4000 4000 4000 4000 4000 Net Cash Flows -40000 10000 10000 10000 10000 10000 10000 10000 10000 10000 10000 -30000 -20000 -10000 0 10000 20000 30000 40000 50000 60000 4 Years IRR 21.41%

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