Flynn Corporation is debating whether to purchase a new computerized production
ID: 2352173 • Letter: F
Question
Flynn Corporation is debating whether to purchase a new computerized production system. The system will cost $450,000, and have an estimated 10-year life with a salvage value of $70,000. The estimated operating results from the new production system are as follows:Incremental Revenue..... $180,000
Incremental Expenses:
Expenses other than depreciation...85,000
Depreciation (straight line)....... 35,000
All revenue and expenses other than depreciation will be received and paid in cash. Compute the following for this proposal:
(a) Annual net cash flow: $__________
(b) Payback period: __________ years
(c) Return on average investment: __________%
(d) Net present value, discounted at an annual rate of 6% (present value of $1 due in 10 years, discounted at 6%, is 0.558; present value of $1 received annually for 10 years, discounted at 6%, is 7.360): $__________
Explanation / Answer
a) Anuual net cash flow = 180,000 -85,000 - 35000 = $60,000 b) Payback period: 450,000/180,000 = 2.5 years or 3 years c) Return: 60,000 *10 -450,000/450,000 = 150,000/450,000 = 1/3 = 33.33%