Low Income Clinic plans to purchase a new centrifuge machine. The machine costs $437,000 and is expected to have a useful life of eight years, with a disposal value of $42,000 at the end of eight years. Low Income Clinic uses straight-line depreciation. Savings in cash operating costs are expected to be $85,000 per year. However, additional working capital is needed to keep the machine running efficiently. The working capital must continually be replaced so an investment of $15,000 needs to be maintained at all times but this investment is fully recoverable at the end of the useful life. Low Income Clinics required rate of return is 8%.

Ignore income taxes.

Required

1. Calculate the payback period.
2. Calculate the simple rate of return.
3. You have the authority to make the purchase decision. Why might you be reluctant to base your decision on these methods?