Question -
1. Monterey Corporation is considering the purchase of a machine costing $52,000 with a 4-year useful life and no salvage value. Monterey uses straight-line depreciation and assumes that the annual cash inflow from the machine will be received uniformly throughout each year. In calculating the accounting rate of return, what is Monterey's average investment?
2. Compute the payback period for each of these two separate investments:
a. A new operating system for an existing machine is expected to cost $250,000 and have a useful life of four years. The system yields an incremental after-tax income of $72,115 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000.
b. A machine costs $180,000, has a $13,000 salvage value, is expected to last seven years, and will generate an after-tax income of $39,000 per year after straight-line depreciation
3. Wenro Company is considering the purchase of an asset for $90,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year.
Year 1 Year 2 Year 3 Year 4 Year 5 Total
Net cash flows 40,000 30,000 40,000 70,000 29,000 209,000
Compute the payback period for this investment.
4. A machine can be purchased for $280,000 and used for 5 years, yielding the following net incomes. In projecting net incomes, double-declining balance depreciation is applied, using a 5-year life and a $50,000 salvage value.
Year 1 Year 2 Year 3 Year 4 Year 5
Net incomes 18,000 48,000 98,000 73,000 198,000
Compute the machine's payback period (ignore taxes)
5. A machine costs $500,000 and is expected to yield an after-tax net income of $19,000 each year. Management predicts this machine has a 9-year service life and a $100,000 salvage value, and it uses straight-line depreciation. Compute this machine's accounting rate of return.