4,5 Accounting Rate-of-Return and Payback Period Methods ET P3. Raab Company is

Question

4,5 Accounting Rate-of-Return and Payback Period Methods ET P3. Raab Company is expanding its production facilities to include a new product line, sporty automotive tire rim. Tire rims can now be produced with little labor cost using H r HZT 134% new computerized machinery. The controller has advised management about two such r HZT machines. Details about each machine follow years Cost of machine Residual value Net income Annual net cash inflows XJS Machine $500,000 50,000 34,965 91,215 HZT Machine $550,000 55,000 40,670 90,170 The company's minimum rate of return is 12 percent. The maximum payback period is six years REQUIRED 1. For each machine, compute the projected accounting rate of return. (Round per- centages to one decimal place.) 2. Compute the payback period for each machine. (Round to one decimal place.) 3. ACCOUNTING CONNECTION Based on the information from requirer the information from requirements I and 2, which machine should be purchased? Why?

Explanation / Answer

1. Computation of Projected Accounting Rate of Return -

2. Computation of Pay-back period -

3. Actually, in both cases of machine purchase the Projected accounting rate is less than 12%, so its not advisable.

Still if we compare both machines, HZT machine's rate of return is more than XJS machine and even payback period is within i.e less than 6 yrs, so it is okay to buy 2nd machine i.e. HZT

Particulars XJS Machine HZT Machine a) Average Net Income $ 34,965 $ 40,670 b) Net Investment $ 4,50,000 $ 4,95,000 c) Projected Annual Rate of Return ( a/b * 100) 7.8 % 8.2 %

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