Harlan Company would like to purchase a new machine that makes wonderfully smoot

Question

Harlan Company would like to purchase a new machine that makes wonderfully smooth fruit sorbet that the company can sell in the premium frozen dessert sections of supermarkets. The machine costs $450,000 and has a useful life of ten years with a salvage value of $50,000. Annual revenues and expenses resulting from the new machine are: Harlan Company will not invest in new equipment unless it promises a payback period of 4 years or less. Compute the payback period on the sorbet machine. Computation of the annual net cash inflow: Compute the simple rate of return on the investment in the new machine. Simple rate of return = Annual incremental revenue _ Annual incremental expenses/Initial investment

Explanation / Answer

Annual Cash Inflow = 240000 + 60000(Depreciation) = 300000 Payback = 450000/300000 = 1.5 Rate of Return = (300000 - 240000)/450000 = 13.33%

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