Question

Problem 16-20 Using the payback period and unadjusted rate of return to evaluate alternative investment opportunities LO 16-4 Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified an attractive investment opportunity. The investment involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $8,040 and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operating expenses associated with selling yogurt are expected to be $6,110 and $860, respectively. Required Determine the payback period for the investment. (Round your answer to 2 decimal places.) Determine the investment's annual incremental net income assuming straightline depreciation for the machine. Determine the unadjusted rate of return for the investment. (Round your answer to 2 decimal places.)

Answer 1

FITCH

PAYBACK PERIOD = Iniatial outlay / Annual cash flow

Annual cash flow = Cash revenue - Cash expenses

= $6,110 - $860 = $5,250

Payback period = $8,040/ $5,250 = 1.53years

Incremental Net Income = Cash revenue - Cash expenses - Depreciation

= $6,110 - $860- ($8,040/3)

= $6,110 - $860 - $2,680

= $2,570

Unadjusted Rate of Return = Average Profit/initial invesment

= $2,570/$8,040

= 31.97%

Step-by-step explanation: