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# Accounting Rate of Return, Payback Period

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Waterman Publishing is considering the purchase of a used printing press costing \$38,400. The printing press would generate a net cash inflow of \$16,000 a year for 3 years. At the end of 3 years, the press would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line depreciation.

A. The project's accounting rate of return (rounded to the nearest percent) on the initial investment is:
8 percent
10 percent
42 percent
75 percent

B. The company uses straight-line depreciation. The investment's payback period in years (rounded to two decimal points) is:
2.00
2.13
2.40
3.00

#### Solution Preview

See attached Excel file.

Waterman Publishing is considering the purchase of a used printing press costing \$38,400. The printing press would generate a net cash inflow of \$16,000 a year for 3 years. At the end of 3 years, the press would have no salvage value. The company's cost of capital is 10 percent. The company uses straight-line ...

#### Solution Summary

Calculates accounting rate of return and payback period for printing press.

\$2.19

## Accounting Rate of Return, Payback period, Internal Rate of Return

The directors of Makeit Ltd. Propose to buy a machine costing \$300,000. At the end of 5 years the machine will be sold for \$ 50,000. In each of the 5 years the machine will increase revenue by \$160,000. Increased annual expenditure of \$ 80,000 will be incurred. Makeit Ltd. will require an increase in working capital of \$40,000. Machinery is depreciated on the straight line method."

Required
a) Calculate the accounting rate of return (ARR) which will result if the machine is purchased.
b) Calculate the discounted payback period for the machine. (Discount rate =10%)
c) i) Calculate the IRR
ii) State with reasons whether the directors should purchase the machine.