J and B industries is debating whether or not to invest in new equipment to manufacture a line of high quality luggage. The new equipment would cost $900,000, with an estimated four year life and no salvage value. The estimated (incremental) annual operating results with the new equipment are as follows:
- Revenue from sales of new luggage line $975,000
- Expenses other than depreciation $675,000
- Depreciation (straight-line) $225,000
- Increase in net income $75,000
Weighted average cost of capital 12%
All revenue from the new luggage line and all expenses (except deprication) will be received or paid in cash the same period as recognized for accounting purposes.
Compute the following for the proposed new luggage line:
1. Annual cash flow $______
2.Payback period (using annual cash flow) _____years
3. Return on investment (using net income) __%