Question

Takhini Hot Springs Company has an old machine that is fully depreciated but has a current salvage value of $5,000. The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value. Expected changes in annual revenues and expenses if the new machine is purchased are: $63,000 Increased revenues Increased expenses: $20,000 9,000 12,000 Salary of additional operator Supplies Depreciation 45,000 $18,000 4,000 Maintenance Increased net income Required 1) What is the payback period on the new equipment? 2) What is the simple rate of return on the new equipment?

Answer 1

Pay back Period=(Cost of machine-Salvage value receivable in case of old asset)/increased income
Pay back period=(60000-5000)/18000
		3.06 years
Year	Cash flow	PVF@ 20%	DISCF	pvf@ 15%	DISCF
0	55,000.00	1	55,000.00	1	55,000.00
1--5	18,000.00	2.99	53,820.00	3.352	60,336.00
Internal rate of return(simple return)=small rate+(cash flow in small rate-target cash flow)/(cash flow in small rate-cash flow in big rate)*big rate-small rate
			15%+(60336-55000)/(60336-53820)*5
			19.09%