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Payback period and rate of return

Jackie is contemplating purchasing a new ditch digging machine that promises savings of 5,600 per year for 10 years. The cost $21,970, and no salvage value is expected. The company's cost of capital is 12%. You have been asked to advise Jackie relative to this capital investment decision. As part of your analysis, compute:

1. The payback period
2. The unadjusted rate of return
3. The net present value
4. The internal rate of return

What factors besides your quantitative analysis should be considered in making this decision?

Solution Preview

The cost $21,970, and no salvage value is expected. The company's cost of capital is 12%. You have been asked to advise Jackie relative to this capital investment decision. As part of your analysis, compute:

1. The payback period
2. The unadjusted rate of return
3. The net present value
4. The internal rate of return

What factors besides your quantitative analysis should be considered in making this decision?

ASSUMPTIONS
1. TAX RATE IS 35%

NET PRESENT VALUE

INITIAL Investment= 21970
DEPRECIATION will be straight line and life is eight ...

Solution Summary

This shows the steps to compute payback period, adjusted rate of return, net present value, and internal rate of return.

$2.19