Question

Lakeside, Inc., is considering replacing old production equipment with state-of-the-art technology that will allow production cost savings of $5,000 per month. The new equipment will have a five-year life and cost $210,000, with an estimated salvage value of $30,000, Lakeside's cost of capital is 9%. Required: Calculate the payback period and the accounting rate of return for the new production equipment. (Round your answers to 2 decimal places.) Payback period Accounting rate of return yoars

Answer 1

Answer:

Payback Period = Initial Investment / Annual Cash Flow
Annual Cash Flow = $5,000 * 12
Annual Cash Flow = $60,000

Payback Period = $210,000 / $60,000
Payback Period = 3.50 years

Accounting Rate of Return = Average Net Profit / Average Investment * 100
Average Net Profit = Annual Cost Saving – Depreciation
Depreciation = ($210,000 - $30,000) / 5
Depreciation = $36,000

Average Net Profit = $60,000 - $36,000
Average Net Profit = $24,000

Average Investment = ($210,000 + $30,000)/ 2
Average Investment = $120,000

Accounting Rate of Return = $24,000 / $120,000 * 100
Accounting Rate of Return = 20.00%