(Ignore income taxes in this problem.) Cotswold Corporation has invested in a ma

Question

(Ignore income taxes in this problem.) Cotswold Corporation has invested in a machine that cost $75,000, that has a useful life of five years, and that has no salvage value at the end of its useful life. The machine is being depreciated by the straight-line method, based on its useful life. It will have a payback period of three years. Given this data, the simple rate of return on the machine is closest to:

Hint: first use the Payback Period formula to get the annual net cash inflow.

20.0%

33.0%

cannot be determined from information provided

13.3%

20.0%

33.0%

cannot be determined from information provided

13.3%

Explanation / Answer

B. 33.0% Cost of Machine                                 75,000.00 Payback Period in years                                            3.00 Cash Flows = 75,000/3 = 25,000 Simple rate of return = Annual Net operating inc/Initial invt Simple rate of return = 25,000/75000 Simple rate of return = 33.33%

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