Harwel Printing Co. is considering the purchase of new electronic printing equip

Question

Harwel Printing Co. is considering the purchase of new electronic printing equipment. It would allow Harwell to increase its net income by S79,992 per year. Other information about this proposed project follows: nitial investment Useful life Salvage value 396,000 6 years $108,000 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 Retum 2. Calculate the payback period for Harwell. (Round your answer to 2 decimal places.) k Period Years

Explanation / Answer

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

= $79,992 / $396,000

= 20.20%

2. Depreciation = Initial investment or cost - salvage value / 6 years

= ($396,000 - $108,000) / 6

= $48,000

Annual Net Cash Flow = Net income + Depreciation

= $79,992 + $48,000

= $ 127,992

Payback period = Initial Investment / Annual Net Cash Flow

= $396,000 / $127,992

= 3.09 years

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