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Posted by jailed on November 23, 2007, 10:32 pm
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The first time i sent this question the formating got messed up. This is the
same question hopefully with better format.
>I am currently taking Financial Accounting and have a problem that I can
>almost solve but am unable how to figure out where on figure comes from.We
>are currently studying how to determine payback period and unadjusted rate
>of return.
>
> Here is the problem:
>
Anthony Savini owns a small automotive repart center. He is considering
expanding the business and has identified two attractive alternatives.
One involves purchasing a machine that would enable Mr. Savini to offer
airconditioning repair to customers.
The machine would cost $2,700 and has an expected useful life of 3 years
with no salvage value.
Additional annual cash revenues and cash operating expenses associated with
repairing aircondition machines are expected to be $1,960 and $300,
respectively.
Alternatively, Mr. Savini could purchase for $3,540 the equipment necessary
to repair exhausts.
That equipment has an expected useful life of 4 years and no salvage value.
Additional annual cash revenues and cash operating expenses associated with
repairing exhaust are expected to be $2,720 and $1,660, respectively.
Income before taxes earned by the repair center is taxed at an effective
rate of 20 percent.
Required
Determine the payback period and unadjusted rate of return (use average
investment) for each alternative.
Round answers to nearest whole dollar amount.
Round payback period and rate of return to 2 decimal places.
Amounts in parentheses do not require a negative sign in front of them.
Omit the "$" and "%" sign in your response.
Alternative 1 Alternative 2
Revenue $1960 $2720
Operating Expenses (300 ) (1660)
Depreciation Expense ( 900 ) ( 885 )
________________________________________
Income Before Tax 760 175
Tax Expense at 20% ( 152 ) ( 35 )
______________________________________
Net Income 608 140
Add Back Depreciation 900 885
________________________________________
Cash Flow Per Year $ 1508 $ 1025
Alternative 1 Alternative 2
Payback Period Payback Period
$2700 $3540
______________=1.79 years. ______ = 3.45 years
$1508 $1025
Unadjusted Rate of Return Unadjusted Rate of Return
$608 $140
__________=45.04% __________ =7.91 %
$1350 $1770
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> I can not figure out where the 1350 and the 1770 come
> from in the unadjusted rate of return. Any help in findout out how this is
> the right answer would be appreciated.
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