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pduvin pduvin
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6 years ago
Fabian Company is considering the purchase of a piece of materials-handling equipment:

Net initial investment   $125,000
Estimated Useful life   8 years
Estimated terminal disposal price   $10,000
Estimated annual cash operating savings   $35,000
Required rate of return   10%
Depreciation method: straight line

Required:
a. Calculate the payback period.
b. Calculate the accrual accounting rate of return.
Textbook 
Cost Accounting: A Managerial Emphasis, Canadian Edition

Cost Accounting: A Managerial Emphasis, Canadian Edition


Edition: 7th
Authors:
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#1
6 years ago
a.   Payback = $125,000/$35,000 = 3.57 years
b.   Annual depreciation = ($125,000 - $10,000)/8 = $14,375
   AARR = ($35,000 - $14,375)/$125,000
   = $20,625/$125,000 = 16.5%
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