## 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 Depreciation 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).

Attachments:

chapter_16_-_problems_1-3.doc