Payback Period and Accounting Rate of Return (with even cash flows)

The Knights Company considers the replacement of some old equipment. The cost of the new equipment is P60,000,

with a useful life estimate of 6 years and no salvage value. The annual cash savings from the use of the new equipment is

P50,000. The old equipment has zero market value and is fully depreciated. The tax rate is 30% and the company uses a

cost of capital of 20%.

Required: a. Payback period and b. accounting rate of return based on:

(1) Original investment (2) average investment