Evaluating a project by the payback period, rate of return
on initial and average investment, and payback reciprocal. A proposal has been
made by the Domingo Food Products Department at Packaging, Inc., to replace a
machine that has 6 years of useful life remaining with a more efficient model.
Relevant annual operating costs are shown below.
The old machine cost $90,000 and has a book value of $37,500. The new machine
costs $82,500 and has an estimated useful life of 6 years with no salvage value.
The current salvage value of the old equipment is equal to the cost of its removal.
Instructions
1. Determine the annual cash savings, and compute the payback period. Round off
your answer to two decimal places.
2. Compute the rate of return on investment based on the initial investment and
based on the average investment. Round off to the nearest tenth of a percent.
3. Compute the payback reciprocal. Round off to the nearest tenth of a percent.

Transcribed Image Text:

Old Machine New Machine Labor $72,500 $37,500 Maintenance 17,500 12,500 Power 10,000 13,750 Depreciation 6,250 13,750