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 $32,400 per year. Other information about this proposed project follows: $180,000 Initial investment Useful life Salvage value 3 years $90,000 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

1. Accounting rate of return for Harwell is:

2. Payback period for Harwell is as calculated below:

Year 0 Year 1 Year 2 Year 3 Total Amount to be invested ($180,000) ($180,000) Increase in Net Income 32,400 32,400 32,400 $97,200 Salvage Value 90,000 $90,000 Net Cash Flow -180,000 32,400 32,400 122,400 7,200 Depreciation (180,000-90,000)/3 -30,000 -30,000 -30,000 ($48,720) Accounting Income 2,400 2,400 92,400 $97,200 Average accounting Income (accounting Income/3) $32,400 Average amount invested $180,000 ARR = Average accounting profit/ Average amount invested 18.0%

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