Question

Question 8 (5 points) Lina Inc. is considering purchasing new equipment for $600,000. It is expected that the equipment will produce annual profit of $15,000 over its 10-year useful life. The salvage value is expected to be zero. Annual depreciation will be $60,000. Required: Calculate the cash payback period (2 marks) and the annual rate of return (3 marks). Show all of your work / calculations for full marks. (Round the final answer for cash payback to two decimal places, such as 1.23 years) (Round the final answer for annual rate of return to zero decimal places, such as 1%, not 1.23%) Cash Payback Period: Annual Rate of Return EQh

Answer 1

Initial Cash Outlay $ 600,000 Annual depreciation = $ 60,000 Annual Net Profit = $15,000 he know, 15000 - 15000 Annual Net Profit - Cash Inflows - Cash Outflows Cash Inflows - Depreciation Cash Inflows= 60,000 Cash Inflows = = $7500 Annual Cash Inflows (before depreciation $75000 after tan, 15000 + 60,000 1) Cash Payback Periodis Payback period Cash Outlay Initial Cash Inflows Annually $ 600,000 $75,000 Cash Payback period 8 years b) Annual Rate of Return: Annual Rate of Return Annual Book Profit Initial investment xloo 15000 X100 600,000 Annual Rote of Return = 2.5%