Question

2.

The management of Nixon Corporation is investigating purchasing equipment that would cost $536,000 and have a 7 year life with no salvage value. The equipment would allow an expansion of capacity that would increase sales revenues by $373,000 per year and cash operating expenses by $215,500 per year. (Ignore income taxes.) Required: Determine the simple rate of return on the investment. (Round your answer to 1 decimal place.) Simple rate of return

Answer 1

Answer with working is given below

$373,000 Sales Revenue Less: Operating expenses Depreciation Net Operating Income $215,500 $76,571 $80,929 Cost of Equipment $536,000 1. Simple rate of return 15.1% $80,929 Net Operating Income Cost of Equipment 15.1% $536,000 Net Operating Income Add: Depreciation Total Annual cash inflow $29,400 $45,800 $75,200 Initial Investment $349,000 4.64 Years Payback Period (Initial Investment/Annual Cash inflow) 13. Net Present Value $127,722 Annual cost savings Add: Depreciation Annual Cash inflow $36,000 $20,900 $56,900 6.145 PV Factor for 10% for 10 years PV Factor for 10% for 10th year 0.386 Present value of cash inflow Present value of Salvage value Total PV of Cash inflows Less Initial Investment Net Present Value $349,626 $8,096 $357,722 $230,000 $127,722 Annual Depreciation Cost of Asset Less: Salvage value Net value Number of years Number of years $230,000 $21,000 $209,000 10 $ 20,900