Ignore Income Taxes In This Problem: Purvell Company Has Ju

Ignore income taxes in this problem) Purvell Company has Ju

Question 1 ignore Income Taxes In This Problem Purvell Company Has Ju

Question 1 Ignore income taxes in this problem.) Purvell Company has just acquired a new machine. Data on the machine follow: Purchase cost $50,000 Annual cost savings $15,000 Life of the machine 8 years The company uses straight-line depreciation and a $5,000 salvage value. (The company considers salvage value in making depreciation deductions.) Assume cash flows occur uniformly throughout a year. The simple rate of return would be closest to Question 2 (Ignore income taxes in this problem.) The Keego Company is planning a $200,000 equipment investment that has an estimated five-year life with no estimated salvage value. The company has projected the following annual cash flows for the investment: Year Cash Inflows 1 $120,,,,,000 Total $300,000 Assuming that the cash inflows occur evenly over the year, the payback period for the investment is _______ years.

Paper For Above instruction

The assessment involves analyzing two investment scenarios employing basic capital budgeting principles—specifically, calculating the simple rate of return for the machine investment and determining the payback period for Keego Company's equipment project. These calculations are fundamental in evaluating the profitability and investment recovery timeline, devoid of income tax considerations as per the problem instructions.

Part 1: Simple Rate of Return for the Machine

The simple rate of return measures the profitability of an investment by comparing the annual incremental savings to the initial investment. It is calculated using the formula:

Simple Rate of Return = (Annual Cost Savings) / (Initial Investment)

Given that Purvell Company has an initial machine cost of $50,000 and annual cost savings of $15,000, the calculation is as follows:

Simple Rate of Return = $15,000 / $50,000 = 0.3 or 30%

Therefore, the simple rate of return on the new machine is approximately 30%, indicating a substantial return based on annual savings relative to the investment cost.

Part 2: Payback Period for Keego Company's Investment

The payback period signifies the time needed to recover the initial investment from the cash inflows generated by the project. Keego Company's investment of $200,000 is projected to produce annual cash flows totaling $300,000 over five years, with cash inflows occurring evenly throughout each year.

Since the total cash inflows over five years amount to $300,000, the average annual cash inflow is:

$300,000 / 5 years = $60,000 per year

Given an initial investment of $200,000, the payback period is computed as:

Payback Period = Initial Investment / Annual Cash Inflows

= $200,000 / $60,000 ≈ 3.33 years

This means Keego Company can expect to recover its initial investment in approximately 3.33 years, which is slightly over three years, indicating a relatively quick recovery period for the project.

Conclusion

In summary, the simple rate of return for Purvell Company's new machine is approximately 30%, suggesting a high return relative to the investment. Meanwhile, Keego Company's project has a payback period of approximately 3.33 years, reflecting an efficient recovery timeline. Both metrics are critical for decision-making in capital investments, especially when income taxes are excluded from the analysis, simplifying the evaluation to cash flows and net savings or investments.

References

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