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Calculate the rate of return on the average investment

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Reference no: EM132317560

Chapter 24 Alternate Domo Problom

A company is planning to buy a now machine at a cost of ($200, 000, The machine Is expected to last for 10 years and have no salvage value at the and of It's useful life.

Straight- line depreciation will be used. The company expects to save 10,000 hours of direct Inbor each year because of the new machine, as well as $4,000 each year in other operating costs.

Management's best estimate is that on average the hourly rate for the labor saved will be $5.50. With the exception of the initial purchase, assume all cash flows take place at the end of the year , and a tax rate of 40%/.

Required :

1. Calculate the payback period on the investment in new machinery.

2. Calculate the rate of return on the average investment.

3. Calculate the net present value of the investment and profitability Index :

(a) Ignoring income taxes , using a discount rate of 10%.

(b) Including the effect of taxes, using a 10% discount rate.

Reference no: EM132317560

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