(Ignore income taxes in this problem.) The Halsey Corporation is contemplating t

Question

(Ignore income taxes in this problem.) The Halsey Corporation is contemplating the purchase of new equipment that would require an initial investment of $125,000. The equipment would have a useful life of six years, with a salvage value of $29,000. This new equipment would be depreciated over its useful life by the straight-line method. It would replace existing equipment which is fully depreciated. The existing equipment has a salvage value now of $38,000. The anticipated annual revenues and expenses associated with the new equipment are:

Assume cash flows occur uniformly throughout a year except for the initial investment and the salvage value at the end of the project.

The payback period is closest to:

5.7 years

4.0 years

2.3 years

1.8 years

For this investment, the simple rate of return to the nearest tenth of a percent is:

43.7%

25.3%

30.4%

17.6%

Explanation / Answer

1) Calculation of payback period   = Initital investment - salvage value of old machine

                                                                          Net annual cash flow

Net annual cash flow  

Revenue                         95,000

Less:expenses

Wages                            41,000

Depreciation                   16,000

Other(all cash)              16,000

Net income                    $22,000

So net annual cash flow = $22,000 + dep $16,000 = $38,000

Payback period = (125,000- $38,000)/ 38,000 = 2.3 years

(2) simple rate of return = Net operating income flow/ initial investment

                                        = $38,000/87,000 = 43.7%

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