Evaluating a project by the payback period, payback reciprocal,
time-adjusted rate of return, and rate of return on initial investment. The
DeSilva Company has an opportunity to expand its production by buying new
equipment at a cost of $140,000. The equipment has an estimated useful life of 5
years, would be depreciated under the straight-line method, and is expected to have
no salvage value. The equipment would add $50,000 per year in net cash flow after
taxes.
Instructions
1. Compute the payback period.
2. Compute the payback reciprocal.
3. Compute the time-adjusted rate of return (to the nearest whole percent). (Use the
table on page 556.)
4. Compute the rate of return on the initial investment (to the nearest tenth of a
percent).