Determine the payback period?

Problem 1

Equipment is purchased at a cost of $80,000. As a result, annual cash revenues are expected to increase by $45,000; annual cash expenses are expected to increase by $12,000; straight-line depreciation is used; the asset has a seven-year life; the salvage value is $10,000. Assume the company is in a 34% tax bracket.

  1. Determine the accounting rate of return? (round to the nearest %)
  2. Determine the payback period?
  3. Determine the NPV assuming a minimum required rate of return of 8%?


Problem 2 (Ignore taxes for this problem)

Terra Networks is planning to buy injection molding machinery costing $180,000. This machinery’s expected useful life is 5 years. They require a minimum rate of return of 8%, and have calculated the following data pertaining to the purchase and operation of this machinery:

Year Estimated Annual

Cash Inflows

Estimated Annual

Cash Outflows

1 $ 40,000 $8,000 $28,000
2 $50,000 $18,000 $28,000
3 $75,000 $22,000 $28,000
4 $105,000 $35,000 $28,000
5 $110,000 $50,000 $28,000
  1. Determine Terra’s payback period, accounting rate of return, and NPV for this investment?


Problem 3

Company X is planning on purchasing a 3-D printer. The expected cost of this printer is $75,000, and it is expected to have a useful life of 6 years and an estimated salvage value of $3,000. The printer is expected to produce cash savings of $23,000 per year in reduced labor costs and the cash operating costs to run this printer are estimated to be $5,000 per year. Assuming Company X is in the 34% tax bracket and has a minimum desired rate of return of 12% on this investment.

Determine the:


  1. (a) payback period, (b) ARR, and (c) NPV (Ignoring taxes), and
  2. (a) payback period, (b) ARR, and (c) NPV (Assuming taxes).



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