M11-4 Calculating Accounting Rate of Return, Payback Period [LO 11-1, 11-2] Blue

Question

M11-4 Calculating Accounting Rate of Return, Payback Period [LO 11-1, 11-2]

Blue Marlin Company is considering the purchase of new equipment for its factory. It will cost $254,000 and have a $50,800 salvage value in five years. The annual net income from the equipment is expected to be $27,940, and depreciation is $40,640 per year.

  
Calculate Blue Marlin’s annual rate of return and payback period for the equipment. (Do not round intermediate calculations. Round your Payback Period to 2 decimal places.)

Explanation / Answer

Annual Rate of Return = Annual Net Income / Initial Investment = $27,940 / $254,000 = 11%

Annual Net Cash Flow = Net income + Depreciation = $27,940 + $40,640 = $68,580

Payback period = Initial Investment / Annual Net Cash Flow = $254,000 / $68,580 = 3.70 years

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.