Calculate the annual rate of return

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Question - Blossom Inc. 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

$80,400

Cost

$38,400

Accumulated depreciation

$41,700

Estimated useful life

8 years

Remaining life

8 years

Salvage value in 8 years

$5,000

Current salvage value

$10,680

Annual cash operating costs

$30,900

Salvage value in 8 years

$0

 

 

Annual cash operating costs

$36,000

 

 

Depreciation is $10,050 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 of $5,000.

Required -

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

(b) Calculate the annual rate of return.

(c) Calculate the net present value assuming a 12% rate of return. (Ignore income taxes.)

Reference no: EM133068491

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