Buckley Company is considering an investment of $760,000 in heavy equipment whic

Question

Buckley Company is considering an investment of $760,000 in heavy equipment which will enable the company to be more competitive in the construction industry.   The useful service life of the equipment is estimated to be 10 years, with $60,000 salvage value.   Straight-line depreciation is used.  The company estimates that net income will increase by $82,000 per year as a result of the company's ability to handle a wider range of projects with the new equipment.

The payback period for this investment is approximately:

Answer

A) 4.7 years.

B) 9.4 years.

C)  8.75 years.

D) 5 years.


The expected rate of return on average investment will be approximately:

Answer

A) 20%. B) 43%.

C) 23%.

D) 37.12%

Explanation / Answer

Hi.

Please find the answer as follows:

Annual Depreciation = (760000 - 60000)/10 = 70000

Annual Cash Inflow = Net Income + Depreciation = 70000 + 82000 = 152000

Payback Period = Initial Investment/Annual Cash Inflow = 760000/152000 = 5 Years

Return on Average Investment = Average Income/Average Investment*100 = 82000/700000/2*100 = 23.42% or 23%

Thanks.

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