M11-4 Calculating Accounting Rate of Return, Payback Period [LO 11-1, 11-2] Blue
ID: 2600746 • Letter: M
Question
M11-4 Calculating Accounting Rate of Return, Payback Period [LO 11-1, 11-2] Blue Marlin Company is considering the purchase of new equipment for its factory. It will cost $249,000 and have a $49,800 salvage value in five years. The annual net income from the equipment is expected to be $29,880, and depreciation is $39,840 per year Calculate Blue Marlin's annual rate of return and payback period for the equipment. (Do not round intermediate calculations. Round your Payback Period to 2 decimal places.) Annual Rate of Retum Payback Period YearsExplanation / Answer
Accounting Rate of Return = Average Profit / Average Investment
As we know that the Net income and Initial investment is same for all years so the average of them will also same of 1 year.
Accounting Rate of Return = $29,880 / $249,000
Accounting Rate of Return = 12%
Cash inflow per year = Net income + Depreciation
= 29,880 + 39,840
Cash inflow per year = $69,720
Year
Inflow per year
Cumulative Cash inflow
1
69,720
69,720
2
69,720
139,440
3
69,720
209,160
4
69,720
278,880
5
69,720
348,600
As we can see that we will receive $249,000 between 3 and 4 years
Payback period = Initial cash outflow / Cash inflow per year
= 3 Years + [(249,000 - 209,160)/ 69,720]
= 3 Years + 0.57 Years
Payback period = 3.57 Years
Year
Inflow per year
Cumulative Cash inflow
1
69,720
69,720
2
69,720
139,440
3
69,720
209,160
4
69,720
278,880
5
69,720
348,600
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