Question

The Snacks Galore is looking to expand its business by adding a new line of vending machines. The management team is considering expanding into either soda machines or snack machines. Following is the relevant financial data relating to the decision:

	Soda Machines	Snack Machines
Investment	$100,000	$150,000
Useful life (years)	5	10
Estimated annual net income generated over useful life	$30,000	$18,000
Residual value	$10,000	$5,000
Depreciation method	straight-line	straight-line
Income tax rate	20%	20%
Required rate of return	8%	12%

Calculate the average rate of return for the snack machines.

Calculate the payback period for the snack machines.

Answer 1

Calculation of cash inflow Annual net income Depreciation Annual cash inflow $18,000 $14,500 ($150,000-$5,000)/10 $32,500 a) Average rate of return-Snack Machines Annual Net Income $18,000 23.2% Average investment $77,500 Average investment Initial investment Salvage value Average investment $150,000 a $5,000 b $77,500 (a+b)/2 b) Payback period- Snack Machines Initial investment $150,000 Annual cash inflows $32,500 4.62 Years