Question

Ramson Corporation is considering purchasing a machine that would cost $633,080 and have a useful life of 9 years. The machine would reduce cash operating costs by $93,100 per year. The machine would have a salvage value of $107,220 at the end of the project. (Ignore income taxes.) Required: a. Compute the payback period for the machine. (Round your answer to 2 decimal places.) b. Compute the simple rate of return for the machine. (Round your intermediate calculations to nearest whole dollar and your final answer to 2 decimal places.) a. Payback period ____ b. Simple rate of return years ____ %

Answer 1

The payback period for the machine is 6.80 years and the simple rate of return is 1.74%.

Step-by-step explanation:

a. Payback period:

The payback period is the amount of time it takes for an investment to recover its initial cost. To calculate the payback period, we divide the initial cost of the machine by the annual cash operating cost savings:

$633,080 / $93,100 = 6.80 years

b. Simple rate of return:

The simple rate of return is calculated by dividing the annual cash flow from the investment by the initial cost of the investment:

($93,100 / 9) / $633,080 = 0.0174 or 1.74%

Answer 2

The payback period for the Ramson Corporation machine is approximately 6.80 years, and the simple rate of return is approximately 5.48%.

Step-by-step explanation:

To calculate the payback period for the Ramson Corporation machine, divide the initial cost of the machine by the annual cash savings. The payback period is calculated as follows:

Initial cost of machine: $633,080
Annual cash operating cost savings: $93,100
Payback period = Initial cost / Annual savings

Payback period = $633,080 / $93,100

Payback period ≈ 6.80 years (rounded to two decimal places)

To calculate the simple rate of return, we need to use the average annual profit from the investment and the initial cost of the machine. Average annual profit is the difference between the annual cash operating cost savings and the depreciation. The simple rate of return is computed as follows:

Annual cash operating cost savings: $93,100
Salvage value at the end of 9 years: $107,220
Annual depreciation = (Initial cost - Salvage value) / Useful life
Average annual profit = Annual cash operating cost savings - Annual depreciation

Annual depreciation = ($633,080 - $107,220) / 9 years

Annual depreciation = $525,860 / 9
Annual depreciation ≈ $58,428

Average annual profit = $93,100 - $58,428
Average annual profit ≈ $34,672

Simple rate of return = (Average annual profit / Initial cost) * 100

Simple rate of return ≈ ($34,672 / $633,080) * 100
Simple rate of return ≈ 5.48% (rounded to two decimal places)