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 $61,088 per year. Other information about this proposed project follows:

Initial investment $ 332,000
Useful life 7 years
Salvage value $ 94,000

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.)

        

2. Calculate the payback period for Harwell. (Round your answer to 2 decimal places.)

Explanation / Answer

1. Accounting rate of return = Annual Net Income / Initial Investment

= $61,088 / $332,000

= 18.4%

2. Depreciation = (Initial investment - Salvage value) / 7 years

= ($332,000 – $94,000) / 7 years = $34,000

Annual Net Cash Flow = Net income + Depreciation = $61,088 + $34,000 = $95,088

Payback period = Initial Investment / Annual Net Cash Flow = $332,000 / $95,088 = 3.49 years

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