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Wizard Company has an old machine that is fully depreciated but has a current salvage value of $10,000. The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value. Expected changes in annual revenues and expenses if the new machine is purchased are Increased revenues $10,000 $120,000 14,000 Increased expenses Salary of additional operator Supplies Depreciation 12,000 Maintenance Increased net income 8.000 (ignore income taxes in this problem.) Required: 1. What is the payback period on the new equipment? 2. What is the simple rate of return on the new equipment? 20.000 $30.000

Wizard Company has an old machine that is fully depreciated but has a current salvage value of $10,000. The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value. Expected changes in annual revenues and expenses if the new machine is purchased are Increased revenues $10,000 $120,000 14,000 Increased expenses Salary of additional operator Supplies Depreciation 12,000 Maintenance Increased net income 8.000 (ignore income taxes in this problem.) Required: 1. What is the payback period on the new equipment? 2. What is the simple rate of return on the new equipment? 20.000 $30.000

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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### Analysis of New Equipment Investment for Wizard Company Wizard Company has an old machine that is fully depreciated and has a current salvage value of $10,000. The company is considering the purchase of new machinery costing $60,000 with a projected useful life of five years and a zero salvage value. Below is the expected change in annual revenues and expenses if the new machine is purchased: #### Expected Financial Changes | Category | Amount | |---------------------------------|----------| | Increased revenues | $120,000 | | Increased expenses | $14,000 | | Salary of additional operator | | | Supplies | | | Depreciation | $12,000 | | Maintenance | $8,000 | | Increased net income | $30,000 | *Note: Ignore income taxes in this problem.* #### Required Analysis 1. **Payback Period** - What is the payback period for the new equipment? 2. **Simple Rate of Return** - What is the simple rate of return on the new equipment? ### Explanation of Financial Metrics 1. **Payback Period** - The payback period is the length of time required to recover the initial investment in the new machine from its net annual after-tax cash inflows. 2. **Simple Rate of Return** - The simple rate of return measures the average annual net income a project is expected to generate divided by the initial investment cost. By evaluating these metrics, Wizard Company can make an informed decision regarding the purchase of the new machinery.
Transcribed Image Text:### Analysis of New Equipment Investment for Wizard Company Wizard Company has an old machine that is fully depreciated and has a current salvage value of $10,000. The company is considering the purchase of new machinery costing $60,000 with a projected useful life of five years and a zero salvage value. Below is the expected change in annual revenues and expenses if the new machine is purchased: #### Expected Financial Changes | Category | Amount | |---------------------------------|----------| | Increased revenues | $120,000 | | Increased expenses | $14,000 | | Salary of additional operator | | | Supplies | | | Depreciation | $12,000 | | Maintenance | $8,000 | | Increased net income | $30,000 | *Note: Ignore income taxes in this problem.* #### Required Analysis 1. **Payback Period** - What is the payback period for the new equipment? 2. **Simple Rate of Return** - What is the simple rate of return on the new equipment? ### Explanation of Financial Metrics 1. **Payback Period** - The payback period is the length of time required to recover the initial investment in the new machine from its net annual after-tax cash inflows. 2. **Simple Rate of Return** - The simple rate of return measures the average annual net income a project is expected to generate divided by the initial investment cost. By evaluating these metrics, Wizard Company can make an informed decision regarding the purchase of the new machinery.
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