1.
Calculation of ARR:
ARR = (Increasing net income per year / Investment) × 100
= (96,741 / 462,875) × 100
= 20.90 % (Answer)
2.
Calculation of Payback period:
Straight-line depreciation per year = (Initial investment – Salvage value) / Life years
= (462,875 – 41,000) / 9
= 421,875 / 9
= 46,875
This is to be added with Net Income in order to get Net Cash Flow (NCF) per year.
NCF per year = Net income + Depreciation expense per year
= 96,741 + 46,875
= 143,616
Payback period = Initial investments / NCF per year
= 462,875 / 143,616
= 3.22 years (Answer)
Note: this indicates the recovery of initial investments in 3.22 years.
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