Question

Bartlett Car Wash Co. is considering the purchase of a new facility. It would allow Bartlett to increase its net income by $53,000 per year. Other information about this proposed project follows: Initial investment $ 510,000 Useful life 8 years Salvage value $ 50,000 Assume straight line depreciation method is used.Calculate the accounting rate of return for Bartlett. ____________ %Calculate the payback period for Bartlett ___________ years

Answer 1

Accounting rate of return = 10.39%

Payback period = 4.62 years

Step-by-step explanation:

The computations are shown below:

For accounting rate of return, it equal to

= Annual net income ÷ Investment

= $53,000 ÷ $510,000

= 10.39%

For payback period, it would be

= Initial investment ÷ Net cash flow

where,

Initial investment is $263,000

And, the net cash flow = annual net operating income + depreciation expenses

= $53,000 + $57,500

= $110,500

The depreciation expense would be

= (Original cost - residual value) ÷ (useful life)

= ($510,000 - $50,000) ÷ (8 years)

= ($460,000) ÷ (8 years)

= $57,500

Now put these values to the above formula

So, the value would equal to

= ($510,000) ÷ ($110,500)

= 4.62 years