Alesi Corporation is considering purchasing a machine that would cost $554,960 a

Question

Alesi Corporation is considering purchasing a machine that would cost $554,960 and have a useful life of 7 years. The machine would reduce cash operating costs by $99,100 per year. The machine would have a salvage value of $107,280 at the end of the project. (Ignore income taxes.)

Compute the payback period for the machine. (Round your answer to 2 decimal places.)

Compute the simple rate of return for the machine. (Round your intermediate answers to nearest whole dollar and your final answer to 2 decimal places.)

Alesi Corporation is considering purchasing a machine that would cost $554,960 and have a useful life of 7 years. The machine would reduce cash operating costs by $99,100 per year. The machine would have a salvage value of $107,280 at the end of the project. (Ignore income taxes.)

Explanation / Answer

a)

Payback period = Investment required ÷ Net annual cash flow

Payback period = $554,960 / $99,100 = 5.6 Years

In this case the salvage value plays no part in the payback period since all of theinvestment is recovered before the end of the project.

b)

Cost of machine, net of salvage value ($554,960 - $107,280) = $447,680

Useful life = 7 Years

Annual depreciation ($447,680 / 7) = $63,954

Simple rate of return = (Annual cost savings - Annual depreciation) / Initial investment

Simple rate of return = ($99,100 - $63,954 ) / $554,960 = 0.0633 or 6.33%

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