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I. Payback period computation, even cash runs Compute the payback period for each in the following two separate investments (round the payback period to two decimals): 1 . A brand new operating system intended for an existing equipment is likely to cost $260, 000 and possess a useful life of five years.

The system yields an incremental after-tax profits of $75, 000 annually after deducting its straight-line depreciation. The predicted repair value with the system is $12, 000. Repayment period=Cost of investment/ Total annual net cashflow =$260, 000/ $125, 500 =2. 08 years Annual depreciation= $260, 000 -$10, 000 as well as 5 = $50, 500 Annual after tax profits $75, 500 Depreciation 60, 000 Annual net cash flow$125, 500 2 . A machine costs $190, 500, has a $10,50, 000 salvage value, is definitely expected to previous nine years, and will create an after-tax income of $30, 500 per year after straight-line downgrading. Payback period=Cost of investment/ Annual net cash flow =$190, 000/ $50, 000 =3. 8 years Annual depreciation= $190, 000 -$10, 500 / being unfaithful = 20 dollars, 000 Twelve-monthly after tax income $30, 000 & Depreciation twenty, 000 Annual net cash flow$50, 000 II. Repayment period computation, uneven cash flows Wenro Company can be considering the purchase of an asset pertaining to $90, 1000. It is anticipated to produce the following net money flows.

The money flows happen evenly through each year. Figure out the repayment period for this investment. Element of year= Amount paid back in year 4/ Net money flows in year some = $10, 000 / $60, 500 = zero. 167 Payback period=3 + 0. 167 = 3. 1367 years = 3yrs 2 without difficulty. III. Accounting Rate of Return A machine costs $500, 500 and is supposed to yield a great after-tax net gain of $15, 000 annually. Management predicts this equipment has a 10-year service life and a hundred buck, 000 repair value, and it uses straight-line depreciation. Compute this machine’s accounting level of go back. Average investment=$500, 000 & $100, 000 / 2 $300, 500 Accounting rate of return=$15, 000 as well as $300, 500 = five per cent IV. Processing Net Present Value K2B Company can be considering the getting equipment that will allow the firm to add a brand new product to its line. The equipment is definitely expected to cost $240, 500 with a 12-year life without salvage worth. It will be declined on a straight-line basis. The business expects to market 96, 500 units of the equipment’s item each year. The expected annual rent related to this equipment uses. K2B proves that the investment must earn at least an 8% return. Figure out the net present value of the investment. Across the net present value to the nearest dollar. ) Net cash runs from net income 1 . Payback period=$240, 000 / $44, 500 = 5. 39 years 2 . Accounting rate of return=$24, 500 / $120, 1000 = 20. 42% Versus. Net Present Value Interstate Manufacturing can be considering both replacing one of its old equipment with a new machine or having the old machine overhauled. Advice about the two alternatives follows. Supervision requires a 10% rate of return on its assets. Alternative one particular: Keep the old machine and still have it overhauled. If the outdated machine is overhauled, it can be kept another five years and then sold for its salvage value. 1 )

Determine the internet present value of alternative 1 . Keep the old machine and also have it overhauled Alternative a couple of: Sell this machine and buy a new one. The brand new machine is far more efficient and definitely will yield substantive operating cost savings with more goods being produced and sold. 2 . Decide the net present value of alternative 2 . Sell off the old equipment and buy home 3. Which will alternative do you recommend that administration select? Describe. Interstate will need to keep the aged machine and overhaul this. The cost cost savings and additional earnings generated within the new machine are not enough to conquer the excessive initial cost of the new equipment.