Jessica Chan Wedding Gowns is considering the purchase of a high-end, industrial sewing machine for $550,000. The sewing machine would replace an old sewing machine, which has a salvage value of $90,000. With the new sewing machine, the company expects to have net operating income of $85,000 per year. Operating expenses include insurance for $25,000, sales commissions of $15,000, and depreciation of $18,000.

Required:

a) Jessica Chan has a policy that the company will not purchase new equipment unless they provide a payback period of five years of less. Will the company invest in the sewing machines? (2 marks)

b) Compute the simple rate of return of the sewing machine. The company requires a simple rate of return of at least 15%. Will the sewing machine be purchased? (2 marks)

c) Are the payback period and simple rate of return methods the best tools to analyze capital budgeting? Indicated at least one other method to analyze capital budgeting (2 marks)