M11-4 Calculating Accounting Rate of Return, Payback Period [LO 11-1, 11-2] Blue
ID: 2528690 • Letter: M
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 $255,000 and have a $51,000 salvage value in five years. The annual net income from the equipment is expected to be $30,600, and depreciation is $40,800 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.)
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.) Annual Rate of Return Payback Period YearsExplanation / Answer
Annual rate of return = 12%
Payback Period = 3.57 Years
WORKINGS
Annual Net Income = $30,600
Depreciation = $40,800
Cost of Equipment = $2,55,000
Annual Net Cash Flow = Net Income + Depreciation
= $30,600 + $40,800
= $71,400
Annual rate of return = 12%
Annual Rate of Return = (Net Income / Cost of Equipment) * 100
= ($30,600 / $255,000)* 100
= 12%
Payback Period = 3.57 Years
Cash Payback Period = Cost of Equipment / Annual Net Cash Flow
= $2,55,000 / $71,400
= 3.57 Years
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