Harwell Printing Co. is considering the purchase of new electronic printing equi

Question

Harwell Printing Co. is considering the purchase of new electronic printing equipment. It would allow Harwell to increase its net income by $38,915 per year. Other information about this proposed project follows Initial investment Useful life Salvage value $215,000 4 years $ 91,000 Assume straight line depreciation method is used Required 1. Calculate the accounting rate of return for Harwell. (Round your percentage answer to 1 decimal place.) Rate of Returm 3% 2. Calculate the payback period for Harwell. (Round your answer to 2 decimal places.) back Period Years

Explanation / Answer

Solution:

Part 1 – Accounting Rate of Return

Net Income means Average Annual Net Income after Depreciation and Taxes

ARR =    

Net Income = Increase in Net Income $38,915 – Annual Depreciation (Initial Investment 215,000 – Salvage Value 91,000)/4

= $38,915 - $31,000

= $8,915

Initial Investment = $215,000

Accounting Rate of Return = Net Income / Initial Investment x 100

= $8,915 / $215,000 x 100

= 4.1%

Part 2 – Payback Period

Payback period is the length of time within which initial investment of the project is recovered back to the company.

This method considers Cash Flows but does not consider time value of money.

Payback period = Initial Investment / Annual Cash Flow

= $215,000 / 38,915

= 5.52 years

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