Problem 1: Use the given to answer the following two question.
Mackenzie Corporation is evaluating a proposal to invest in a machine costing $60,000. The machine has an estimated useful life of ten years, and an estimated salvage value of $10,000. The machine will increase the company's net income by approximately $7,000 per year. All revenue and expenses other than depreciation will be received and paid in cash.
A) Refer to the information above. The payback period of the machine is:
a. Four years
b. Five years
c. Six years
d. Ten years
B) Refer to the information above. The expected rate of return on average investment of the machine is:
a. 10%
b. 17%
c. 20%
d. 48%
Problem 2: Scott Corporation has borrowed $40,000 that must be repaid in two years. This $40,000 is to be invested in an eight-year project with an estimated annual net cash flow of $10,000. The payback period for this investment is:
a. Two years
b. Four years
c. Eight years
d. Indeterminable with the given information
Problem 3: Use the following to answer the following questions.
Shawnee Labs is considering buying equipment which would enable the company to obtain a four-year research contract. The specialized equipment costs $600,000 and will have no salvage value when the four-year contract period is over. The estimated annual operating results of the project are as follows:
Revenue $650,000
Expenses (including straight-line depreciation) (600,000)
Increase in Net Income $50,000
All revenue from the contract and all expenses (except depreciation) will be received or paid in cash in the same period as recognized for accounting purposes.
A) Refer to the information above. The payback period for the investment in equipment is:
a. 12 years
b. 3 years
c. 4 years
d. 1.2 years
B) Refer to the information above. The return on average investment for this investment is approximately: