Acme Company is considering replacing outdated production equipment that will allow for production cost savings of...
Acme Company is considering replacing outdated production
equipment that will allow for production cost savings of $20,000
per month. The new equipment will have a five-year life and cost
$800,000, with an estimated salvage value of $50,000. Acme's cost
of capital is 10%.
Calculate the payback period and the accounting rate of return for
the new production equipment.
Homework Answers
Payback period = Initial investment/Annual Cost saving = 800000/240000 = 3.33 years
Accounting rate of return = Net income/Average investment = 90000/425000 = 21.18%
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