Reference no: EM133019018

Questions - Part A - Ishpreet Hot Springs Company has an old machine that is fully depreciated but has a current salvage value of $4,000. 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:

Increased revenues $63,000

Increased expenses:

Salary of additional operator $20,000

Supplies 9,000

Depreciation 11,000

Maintenance 4,000 44,000

Increased net income $19,000

Required -

1. What is the payback period on the new equipment?

2. What is the simple rate of return on the new equipment?

Part B - You have just learned that you are a beneficiary in the will of your late Aunt Ishpreet. The executrix of her estate has given you three options as to how you may receive your inheritance:

a. You may receive $50,000 immediately.

b. You may receive $80,000 at the end of six years.

c. You may receive $12,000 at the end of each year for six years (a total of $72,000).

If you can invest money at a 11% return, which option would you prefer?