Takini Hot Springs has an old machine that is fully depreciated but has a current salvage value of $5,000.

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Takini Hot Springs has an old machine that is fully depreciated but has a current salvage value of $5,000. The company wants to purchase a new machine that would cost $60,000 and have a five-year useful life and zero salvage value. Expected changes in annual avenues and expenses if the new machine is purchased are shown as above:

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Required:

  1. What’s the payback period of the new machine?
  2. What’s the simple rate of return on the new machine?

Q.2

Black Mountain Summit Company is considering starting a small catering business in Whitehorse, The company would need to purchase a delivery van and equipment costing $125,000 to operate the business and another $60,000 for inventories and other working capital needs. Rent for the building to be used by the business will be $35,000 per year. Ken, a business student and part-time employee at Black Mountain Summit indicates that annual cash inflow from the business will amount to $120,000. Other than the building rent, annual cash outflow for operating costs will amount to $40,000. Ken wants to operate the business for only 6 years. He estimates the equipment could be sold at that time for 4% of its original cost. Ken uses a 16% discount rate. (Ignore income taxes in this problem)

Required:

Should Ken take this investment? Use Net Present Value and Profitability analysis to support the decision.

Thanks!

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