Howell Company Is Considering the Purchase of Some Equipment

question 35

Essay

Howell Company is considering the purchase of some equipment. The initial investment will be $80,000. The estimated useful life of the equipment will be 5 years, at which point it will have a zero terminal salvage value. The annual savings in cash operating costs will equal $19,000, and the company has a minimum desired rate of return of 12%. Use straight- line depreciation and ignore income taxes.
Compute:
a. Net present value
b. Payback period
c. Accounting rate of return using initial investment

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Definitions:

Welfare Recipients

Individuals or households that receive financial assistance or aid from government programs.

Poverty Line

The minimum level of income deemed necessary to achieve an adequate standard of living in a given country or region.

Income Quintile

A statistical division of population into five equal groups according to income levels.

Federal Income Tax

A tax levied by the United States federal government on the annual income of individuals, corporations, trusts, and other legal entities.