Ramson Corporation is considering purchasing a machine that would cost $554,960

Question

Ramson Corporation is considering purchasing a machine that would cost $554,960 and have a useful life of 7 years. The machine would reduce cash operating costs by $99,100 per year. The machine would have a salvage value of $107,280 at the end of the project. (Ignore income taxes.)

Required:

a. Compute the payback period for the machine. (Round your answer to 2 decimal places.)

b. Compute the simple rate of return for the machine. (Round your intermediary answers to nearest whole dollar and your final answer to 2 decimal places.)

Explanation / Answer

a) Payback period = Initial investment / Operating Cash flow per annum = 554960/99100 = 5.6 years b) Simple rate of return = incremental net income / Initial investment = 99160/554960 = 17.87% Note : Savings in cash operating cost is same as operating cash flow or incremental net income

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