Computing the payback period and unadjusted rate of return for the same investment opportunity Gunter Marina (Guntersville)

Question:

Computing the payback period and unadjusted rate of return for the same investment opportunity Gunter Marina (Guntersville) rents pontoon boats to customers. It has the opportunity to purchase an additional pontoon boat for $30,000; it has an expected useful life of four years and no salvage value. Guntersville uses straight-line depreciation. Expected rental revenue for the boat is $10,000 per year.

Required

a. Determine the payback period.

b. Determine the unadjusted rate of return based on the average cost of the investment.

c. Assume that the company’s desired rate of return is 30 percent. Should Guntersville purchase the additional boat?

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...