Seth Fitch owns a small retail ice cream parlor. He is considering expanding the

Question

Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $7,950 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,020 and $830, respectively.
Alternatively, Mr. Fitch could purchase for $9,720 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be $8,320 and $2,300, respectively.
Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.
Required
Determine the payback period and unadjusted rate of return (use average investment) for each alternative. (Round your answers to 2 decimal places.) Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $7,950 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,020 and $830, respectively.
Alternatively, Mr. Fitch could purchase for $9,720 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be $8,320 and $2,300, respectively.
Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.
Required
Determine the payback period and unadjusted rate of return (use average investment) for each alternative. (Round your answers to 2 decimal places.) Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives. One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $7,950 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,020 and $830, respectively.
Alternatively, Mr. Fitch could purchase for $9,720 the equipment necessary to serve cappuccino. That equipment has an expected useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling cappuccino are expected to be $8,320 and $2,300, respectively.
Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.
Required
Determine the payback period and unadjusted rate of return (use average investment) for each alternative. (Round your answers to 2 decimal places.)

Explanation / Answer

(7950/3)

Yogurt Cappuccino Value of Machine $ 7,950.00 $ 9,720.00 Salvage Value $0 $0 Years 3 4 Depriciation per year $ 2,650.00

(7950/3)

$ 2,430.00 (9720/4) Sales $ 6,020.00 $8,320 less:Operating Expenses $ 830 $2,300 Operating Income $5,190 $6,020 Less:Depriciation $2,650 $2,430 Earnings Before Tax $2,540 $3,590 Tax @ 20% $508 $718 Earnings After Tax $2,032 $2,872 Add:Depriciation $2,650 $2,430 Cash Flow Each Year $4,682 $5,302 Payback Period (years) 1.70($7950/$4682) 1.83($9720/$5302) Average Investment (opening investment+closing investment)/2 $3,975($7950/2) $4,860($9720/2) Unadjusted Rate Of return(Earning After Tax / Average Investment) 51.12%($2,032/$3,975) 59.09%($2,872/$4,860)

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