Woods Company is considering the purchase of some equipment. The initial investment will be $100,000. The estimated useful life of the equipment will be 5 years, at which point it will have a zero terminal salvage value
The annual savings in cash operating costs at the end of each year, for five years, is $29,000. The company has a minimum desired rate of return of 12%. The company uses straight-line depreciation for financial reporting. Ignore income taxes. The cash operating savings of $29,000 do not include depreciation expense.
Given:
The present value of ordinary annuity of one at 12% and 5 periods is 3.6048.
The present value of one at 12% and 5 periods is 0.5674.
Required:
Compute:
A) Net present value
B) Payback period
C) Accounting rate of return using the average investment
A) ($29,000 × 3.6048 ) - $100,000 = $4,539.20
B) $100,000/$29,000 = 3.45 years
C) $29,000 - $20,000 = 18%
$50,000
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