Colchester Company is considering purchasing a new piece of equipment. Relevant information concerning the equipment follows: Purchase
Question:
Colchester Company is considering purchasing a new piece of equipment. Relevant information concerning the equipment follows:
Purchase cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180,000
Annual cost savings that will be
Provided by the equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,500
Life of the equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 years
Required:
Ignore income taxes.
1. Compute the payback period for the equipment. If the company rejects all proposals with a payback period of more than four years, will the equipment be purchased?
2. Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment’s useful life, assuming $0 salvage value. Will the equipment be purchased if the company’s required rate of return is 14%?
Salvage ValueSalvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
Step by Step Answer:
1 The payback period would be Payback Period Investment required Net ...View the full answer
Managerial Accounting
ISBN: 978-1259024900
9th canadian edition
Authors: Ray Garrison, Theresa Libby, Alan Webb
