Ferris Company has an old machine that is fully depreciated but has a current salvage value of $5,000.The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value.Expected changes in annual revenues and expenses if the new machine is purchased are:

$\begin{array}{lccc}
\text { Increased revenues } & & \$ 63,000 \
\text { Increased expenses: } & & \
\quad \text { Salary of additional operator } &\$ 20,000 & \
\text { Supplies } & 9,000 & \
\text { Depreciation } 12,000 \
\text { Maintenance } & 4,000 & 45,000\
\text { Increased net income } & & \$ 18,000
\end{array}$

(Ignore income taxes in this problem.)

Required:

a) What is the payback period on the new equipment?
b) What is the simple rate of return on the new equipment?

Question

Ferris Company has an old machine that is fully depreciated but has a current salvage value of $5,000.The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value.Expected changes in annual revenues and expenses if the new machine is purchased are:

$\begin{array}{lccc}
\text { Increased revenues } & & \$ 63,000 \
\text { Increased expenses: } & & \
\quad \text { Salary of additional operator } &\$ 20,000  & \
\text { Supplies } & 9,000  & \
\text { Depreciation } 12,000  \
\text { Maintenance } & 4,000 & 45,000\
\text { Increased net income } & & \$ 18,000
\end{array}$

(Ignore income taxes in this problem.)

Required:

a) What is the payback period on the new equipment?
b) What is the simple rate of return on the new equipment?

Quizplus · Accepted Answer

The Answer of Ferris Company has an old machine that is fully depreciated but has a current salvage value of $5,000.The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value.Expected changes in annual revenues and expenses if the new machine is purchased are:

$\begin{array}{lccc}
\text { Increased revenues } & & \$ 63,000 \
\text { Increased expenses: } & & \
\quad \text { Salary of additional operator } &\$ 20,000  & \
\text { Supplies } & 9,000  & \
\text { Depreciation } 12,000  \
\text { Maintenance } & 4,000 & 45,000\
\text { Increased net income } & & \$ 18,000
\end{array}$

(Ignore income taxes in this problem.)

Required:

a) What is the payback period on the new equipment?
b) What is the simple rate of return on the new equipment?

Ferris Company Has an Old Machine That Is Fully Depreciated