Question

Harwell Printing Co. is considering the purchase of new electronic printing equipment. It would allow Harwell to increase its net income by $52,734 per year. Other information about this proposed project follows:

Initial Investment	282,000
Useful Life	5 years
Salvage Value	97,000

Assume straight line depreciation method is used.     

Required:

1. Calculate the accounting rate of return for Harwell. (Round your percentage answer to 1 decimal place.)

2. Calculate the payback period for Harwell. (Round your answer to 2 decimal places.)

Answer 1

1) Accounting rate of return = Net annual income/Initial investment

= 52,734/282,000

= 18.7%

2) Payback period = Initial investment/Net annual cash flow

= 282,000/[52,734 + (282,000-97,000)/5]

= 285,000/89,734

= 3.18 years

Comment if you face any issues