Fritz Company Is Planning to Acquire a $250,000 Machine to Improve

question 112

Essay

Fritz Company is planning to acquire a $250,000 machine to improve manufacturing efficiencies, thereby reducing annual cash operating costs (before taxes) by a projected $80,000 for each of the next five years. The company requires a minimum rate of return of 8% on all capital investments. The machine will be depreciated using straight-line method over a five-year period with no salvage value at the end of five years. Fritz is subject to a combined 40% income tax rate.
Required:
1. What is the machine's payback period, in years (rounded to one decimal place, e.g., 4.2483 years = 4.2 years), under the assumption that cash flows occur evenly throughout the year?
2. What is the accounting (book) rate of return (ARR), based on the initial investment amount (rounded to one decimal place, that is, rounded to the nearest one-tenth of a percent, e.g., 12.342% = 12.3%)?

---

Definitions:

Residual Value

The estimated value that an asset will have at the end of its useful life, also known as salvage value.

Gain Or Loss

The difference between the selling price and the purchase price of an asset, resulting in a financial profit or loss.

Disposal Of Equipment

The process of selling, scrapping, or eliminating machinery or equipment that is no longer needed.

Book Value

The value of a company based on its financial statements, calculated by assets minus liabilities.