Problem 10--Payback Period and Simple Rate of Return Gocke Company is considerin

Question

Problem 10--Payback Period and Simple Rate of Return

Gocke Company is considering purchasing a machine that would cost $478,800 and have a useful life of 5 years.  The machine would reduce cash operating costs by $114,000 per year. The machine would have no salvage value.

Required

a.       Compute the payback period for the machine.  Show your work

b.      Compute the simple rate of return for the machine.  Show your work.  HINT: You must subtract out depreciation from the cash flow to get the net income. Assume straight-line depreciation

Explanation / Answer

pay back period = 478000/114000 = 4.2 years

b) annual depriciation = 478800/5 = 95760

annual incremental net operating income = 114000 - 95760 = 18240

simple rate of return = 18240/478800 = 0.038 = 3.8%

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