White Bakery plans to produce 15,000 cakes per year. The company is considering purchasing new cake decorating equipment. The new equipment would cost $30,000. This equipment qualifies for the use of MACRS (3-year asset class) and would be sold at the end of 3 years for an estimated $6,000. The company estimates that with the new equipment revenues will be $2.60 per cake and variable expenses will be $2 per cake. All revenues and expenses are paid in cash. The company does not have any fixed expenses. A 10% rate of return is required on all investments (cost of capital is 10%). White expects its tax rate to be 30%. What is an accounting rate of return on original investment (ignoring taxes; e.g., assume that the tax rate is zero)? What is a payback period on this investment (ignoring taxes; e.g., assume that the tax rate is zero)?
White Bakery plans to produce 15,000 cakes per year. The company is considering purchasing new cake decorating equipment. The new equipment would cost $30,000. This equipment qualifies for the use of MACRS (3-year asset class) and would be sold at the end of 3 years for an estimated $6,000. The company estimates that with the new equipment revenues will be $2.60 per cake and variable expenses will be $2 per cake. All revenues and expenses are paid in cash. The company does not have any fixed expenses. A 10%
What is an accounting rate of return on original investment (ignoring taxes; e.g., assume that the tax rate is zero)?
What is a payback period on this investment (ignoring taxes; e.g., assume that the tax rate is zero)?
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