ABC Steel Co. is considering buying a new machine in order to increase its production capacity using new technology. Details about the new equipment are below: Purchase Cost 300,000Savings offered by the new machine $62,500 Life of the new machine per year 15 years 1.-Calculate the payback period for the new machine a. 7.2 years b. 6.8 years c. 4.8 years d. 12.4 years 2.-The corporate policy of ABC Steel Co. is to reject all proposal with a payback period of more than 7 years. Therefore, would ABC buy the new machine? a. yes b. no c. cannot be determined d. none of above 3.-Calculate the simple rate of return of the equipment using the straight-line depreciation method based on the new machine's useful life. a. 1096 b. 14.16%c. 16.49%d. 9.34% 4.-The corporate policy of ABC Steel Co. is to require a rate of return of 10%. Based on this requirement, would ABC buy the new machine? a. yes b. no c. cannot be determined d. none of above

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hamzatauseef hamzatauseef · Answer 1 · 2019-12-22T13:18:14+01:00

Answer:

See below.

Explanation:

We calculate payback period as,

Payback = initial outlay / savings

Payback = 300,000/ 62500 = 4.8 years

The project has payback of well below 7 years and as such the project is acceptable.

We calculate profits to compute rate of return.

Profit / year = cash flow - depreciation for the year

Depreciation / year = 300,000/15 = $20,000

Profit = 62,500 - 20,000 = $42,500

Rate of return = profit / investment

RoR = 42,500 / 300,000 = 14.16%

Since the RoR is greater than required 10%, the project is acceptable.

Hope that helps.