Howard and Hillery Services is planning a new business venture. With $100,000 of available funds to invest,

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Howard and Hillery Services is planning a new business venture. With $100,000 of available funds to invest, it is investigating two options. One is to acquire an exclusive contract to operate vending machines in civic and recreation centers in a small suburban city for four years. The contract requires the firm to pay the city $60,000 cash at the beginning. The firm expects the cash revenue from the operation to be $50,000 per year and the cash expenses to be $28,000 per year. The second option is to operate a printing shop in an office complex. This option would require the company to spend $80,000 for printing equipment that has a useful life of four years with a zero salvage value. The cash revenue is expected to be $85,000 per year and cash expenses are expected to be $47,000 per year. The firm uses the straight-line method of depreciation. Its effective income tax rate is expected to be 25 percent.

Required
Round computations to two decimal points.
a. Determine the payback period and unadjusted rate of return (use average investment) for each alternative.
b. Indicate which investment alternative you would recommend. Explain your choice.

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,...
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Fundamental Managerial Accounting Concepts

ISBN: 978-0078025655

7th edition

Authors: Thomas Edmonds, Christopher Edmonds, Bor Yi Tsay, Philip Old

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