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

Payback period = Initial investment/Annual cash flow

= 450000/120000

Payback period = 3.75 years

Accounting rate of return = Net income*100/average investment

Net income = 120000-(450000-30000/5) = 36000

Average investment = (450000+30000/2) = 240000

Accounting rate of return = 36000*100/240000 = 15%

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