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%)?

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Definitions:

Accounts Receivable Turnover

A financial ratio that measures how efficiently a company collects revenue from its credit sales, calculated by dividing net credit sales by the average accounts receivable.

Sales On Account

Transactions where goods or services are sold with the understanding that payment will be made at a later date, typically recorded as accounts receivable.

Working Capital

Refers to the difference between a company's current assets and current liabilities, indicating its short-term liquidity and ability to fund its operations.

Financial Data

Information related to money matters of a company, including its revenue, expenses, profits, and losses.