Lakeside, Inc., is considering replacing old production equipment with state-of-

Question

Lakeside, Inc., is considering replacing old production equipment with state-of-the-art technology that will allow production cost savings of $10,000 per month. The new equipment will have a five-year life and cost $450,000, with an estimated salvage value of $30,000. Lakeside's cost of capital is 10%. Required: Calculate the payback period and the accounting rate of return for the new production equipment. (Round your answers to 2 decimal places.) Payback period Accounting rate of return eturnyeans

Explanation / Answer

Cash flow x Discount Factor = PV PV of net annual cash flows 120000 x 3.79079 = 454894.8 PV of Salvage values 30000 x 0.62092 = 18627.6 Capital Investment 450000 NPV 23522.4 Payback Period 450000 / 120000 3.75 Assume Depreciation is at SLM (450000-30000)/5= 84000 Annual Depreciation Average annual profit 120000-84000= 36000 Average investment (450000+30000)/2= 240000 ARR = average annual profit / average investment 15%

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