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 $44,640 per year. Other information about this proposed project follows Initial investment Useful life Salvage value $240,000 4 years $96,000 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.) Accounting Rate of Return 2. Calculate the payback period for Harwell. (Round your answer to 2 decimal places.) Payback Period Years

Explanation / Answer

Req 1: Accounting rate of return Net income: $ 44,640 Initial inventment $ 240,000 Accounting rate of return = Net income / initial investment *100                                                       ( 44640 /240000 ) *100 = 18.60% Req2: Payback period Initial Investment   $240,000 Salvage value $96,000 Estimated life   4 years Annual depreciation = Cost - Salvage / estiamted life                                            ( 240,000 -96,000 ) / 4 = $ 36,000 Annual cash inflows = Net income + Non cash expense                                           ( 44640 + 36000 ) = $ 80,640 Payback period = Initial Investment / Annual cash inflows                                 ( 240,000 / 80,640) = 2.98 years

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