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Determine the cash payback period

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Question - A corp is considering modernizing its production facility by investing in new equipment and selling the old equipment. The following information has been collected on this investment.

Old Equipment New Equipment

Cost $80,800 Cost $38,560

Accumulated depreciation $40,400 Estimated useful life 8 years

Remaining life 8 years Salvage value in 8 years $4,592

Current salvage value $10,600 Annual cash operating costs $29,600

Salvage value in 8 years $0

Annual cash operating costs $36,000

Depreciation is $10,100 per year for the old equipment. The straight-line depreciation method would be used for the new equipment over an eight-year period with salvage value $4,592.

a) Determine the cash payback period (Ignore income taxes). (Cash payback period in years)

b) Calculate the annual rate of return.

c) Calculate the net present value assuming a 18% rate of return (Ignore income taxes).

d) Should the company purchase the new equipment?

Reference no: EM131801991

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