Exercise 168 (Part Level Submission) (a) SAVE FOR LATER SUBMIT ANSWER (b) The pa

Question

Exercise 168 (Part Level Submission)

(a)

SAVE FOR LATER

SUBMIT ANSWER

(b)

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Exercise 168 (Part Level Submission)

Gantner Company is considering a capital investment of $300,000 in additional productive facilities. The new machinery is expected to have a useful life of 5 years with no salvage value. Depreciation is computed by the straight-line method. During the life of the investment, annual net income and cash inflows are expected to be $27,000 and $87,000, respectively. Gantner has a 12% cost of capital rate, which is the minimum acceptable rate of return on the investment.

Explanation / Answer

SOLUTION

(A) Annual rate of return =

= $27,000 / (($300,000+$)/2)

= $27,000 / $150,000 = 18%

Cash Payback =

= $300,000 / $87,000

= 3.45 years

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