Seth Fitch owns a small retall ice cream parlor. He is considering expanding the business and has identified two attracti One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operati associated with selling yogurt are expected to be $6,120 and $880, respectively. Alternatively, Mr. Fitch could purchase for $9,840 the equipment necessary to serve cappuccino. That equipment has an useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated cappuccino are expected to be $8,310 and $2,300, respectively. Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.
Seth Fitch owns a small retall ice cream parlor. He is considering expanding the business and has identified two attracti One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would and has an expected useful life of three years with no salvage value. Additional annual cash revenues and cash operati associated with selling yogurt are expected to be $6,120 and $880, respectively. Alternatively, Mr. Fitch could purchase for $9,840 the equipment necessary to serve cappuccino. That equipment has an useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated cappuccino are expected to be $8,310 and $2,300, respectively. Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
Related questions
Question
Mm.8.
Subject:- account
Transcribed Image Text:Seth Fitch owns a small retail ice cream parlor. He is considering expanding the business and has identified two attractive alternatives.
One involves purchasing a machine that would enable Mr. Fitch to offer frozen yogurt to customers. The machine would cost $8,100
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 $6,120 and $880, respectively.
Alternatively, Mr. Fitch could purchase for $9,840 the equipment necessary to serve cappuccino. That equipment has an expected
useful life of four years and no salvage value. Additional annual cash revenues and cash operating expenses associated with selling
cappuccino are expected to be $8,310 and $2,300, respectively.
Income before taxes earned by the ice cream parlor is taxed at an effective rate of 20 percent.
Required
a. Determine the payback period and unadjusted rate of return (use average investment) for each alternative. (Round your answers to
2 decimal places.)
Payback period
Unadjusted rate of return
Answer is not complete.
Alternative 1
1.71
68.24
years
%
Alternative 2
years
%
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Step 1: Define payback period:
VIEWStep 2: Calculation of Pay back period for Alternative 1 (Machine):
VIEWStep 3: Calculation of Unadjusted Rate of return for Alternative 1 (Machine):
VIEWStep 4: Calculation of Pay back period for Alternative 2 (equipment):
VIEWStep 5: Calculation of Unadjusted Rate of return for Alternative 2 (equipment):
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