Harvell Printing Co. is considering the purchase of new electronic printing equi

Question

Harvell Printing Co. is considering the purchase of new electronic printing equipment. It would allow Harwell to increase its net income by $38,915 per year. Other information about this proposed project follows: Initial investment $215,000 4 years Salvage value 91,000 Assume straight line depreciation method is used. Required: 1. Calculate the accounting rate of return for Harell. (Round your percentage answer to 1 decimal place.) g Rate of Return 2. Calculate the payback period for Harwell. (Round your answer to 2 decimal places.) ayback Period

Explanation / Answer

1. Accounting rate of return = Annual Net Income / Initial Investment

= $38,915 / $215,000

= 18.1%

2. Depreciation = (Initial investment or cost - Salvage value) / 4 years = ($215,000 - $91,000) / 4 years = $31,000

Annual Net Cash Flow = Net income + Depreciation = $38,915 + $31,000 = $69,915

Payback period = Initial Investment / Annual Net Cash Flow = $215,000 / $69,915 = 3.08 years

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