Brewer Company is considering purchasing a machine that would cost $633,080 and

Question

Brewer Company is considering purchasing a machine that would cost $633,080 and have a useful life of 9 years. The machine would reduce cash operating costs by $93,100 per year. The machine would have a salvage value of $107,220 at the end of the project. (Ignore income taxes.)

Compute the simple rate of return for the machine. (Round your intermediary answers to nearest whole dollar and your final answer to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

A). Payback period is the period in which investor able to realize its initial investment.

Total amount realized from asset upp to 6th year(93100 * 6) = 558600

Total amount realized from asset upp to 7th year(93100 * 7) = 651700

so payback period will be 6.8 years.

B). Simple rate of return for the machine = (Total realization - initial investment) / initial investment

Total realization from asset = 93100 * 9 + 107,220 = 945120

Simple rate of return = (945120 - 633080) / 633080

= 49.29 %

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