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Payback period and rate of return

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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?

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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
See Also This Related BrainMass Solution

Payback Period; Rate of Return; Return on Investment

Use the following to answer questions 44-45.
Mackenzie Corporation is evaluating a proposal to invest in a machine costing $60,000. The machine has an estimated useful life of ten years, and an estimated salvage value of $10,000. The machine will increase the company's net income by approximately $7,000 per year. All revenue and expenses other than depreciation will be received and paid in cash.

44. Refer to the information above. The payback period of the machine is:
a. Four years
b. Five years
c. Six years
d. Ten years

45. Refer to the information above. The expected rate of return on average investment of the machine is:
a. 10%
b. 17%
c. 20%
d. 48%

46. Scott Corporation has borrowed $40,000 that must be repaid in two years. This $40,000 is to be invested in an eight-year project with an estimated annual net cash flow of $10,000. The payback period for this investment is:
a. Two years
b. Four years
c. Eight years
d. Indeterminable with the given information

Use the following to answer questions 47-48.
Shawnee Labs is considering buying equipment which would enable the company to obtain a four-year research contract. The specialized equipment costs $600,000 and will have no salvage value when the four-year contract period is over. The estimated annual operating results of the project are as follows:
Revenue $650,000
Expenses (including straight-line depreciation) (600,000)
Increase in Net Income $50,000
All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.

47. Refer to the information above. The payback period for the investment in equipment is:
a. 12 years
b. 3 years
c. 4 years
d. 1.2 years

48. Refer to the information above. The return on average investment for this investment is approximately:
a. 33 1/3%
b. 8 1/3%
c. 66 2/3%
d. 16 2/3%

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