Question 1

Time: 33 minutes

Total:20 marks

Part A: (10 marks)

Ishpreet Hot Springs Company has an old machine that is fully depreciated but has a current salvage value of $8,000. The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value. Expected changes in annual revenues and expenses if the new machine is purchased are:

Increased revenues

$63,000

Increased expenses:

Salary of additional operator

$20,000

Supplies

9,000

Depreciation

9,000

Maintenance

4,000

42,000

Increased net income

$21,000

Required: (answer to 2 decimal points)

1.What is the payback period on the new equipment? (5Marks)

2.What is the simple rate of return on the new equipment? (5 marks)

Part B: (10 marks)

You have just learned that you are a beneficiary in the will of your late Aunt Ishpreet. The executrix of her estate has given you three options as to how you may receive your inheritance:

a.You may receive $57,000 immediately.

b.You may receive $95,000 at the end of six years.

c.You may receive $12,000 at the end of each year for six years (a total of $72,000).

If you can invest money at an 8% return, which option would you prefer? (show your detailed calculation)