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Calculating Payback Rates and ROI

Existing machine:
Costs: 82,500, fully depreciated except for 7,500 salvage value.
Operating costs:
Maintenance: 67,500

Costs from alternatives (after five years, both machines have for tax purpose a zero salvage value):

Machine 1
Purchase: 160,000
Operating costs: 45,000/ year
Maintenance: 27,000 for the first three (3) years, 49,500 for each year after
Salvage value: 7,500

Machine 2
Purchase: 300,000
Operating costs: 18,000/ year
Maintenance: 30,000 for the first three (3) years, 52,500 for each year after
Salvage value: 12,000

Tax rate: 35%
The total amount of overhead, absorbed by the department with the new machine will be decreased by about 31,000 with machine 1 and 58,000 with machine 2.

Depreciation:
Machine 1 Machine 2
2000 (year 1) 28,560 53,550
2001 (year 2) 37,552 70,410
2002 (year 3) 26,816 50,280
2003 (year 4) 19,152 35,910
2004 (year 5) 14,192 26,610
2005 (year 6) 14,192 26,610

Calculate the ROI and the payback rate. Must I take the overhead costs into consideration? What would be the ROI and the payback rate?

Solution Summary

Instructions for how to determine payback rates and ROI are provided.

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