QUESTION 5

Payback Method, Simple Rate of Return

Volkey Company has an old machine that is fully depreciated but has a current salvage value of $5,000. 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:

(Ignore income taxes in this problem.)

Required:

1. What is the payback period on the new equipment?

2. What is the simple rate of return on the new equipment?