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In: Finance

Candy is a successful small business owner who has $250,000 to invest in a new equipment...

  1. Candy is a successful small business owner who has $250,000 to invest in a new equipment which will enhance her operations. Help her to calculate the rate of return for this investment if the depreciable life of the equipment is 10 years, and the annual profit (net of depreciation) is $30,000.

Is this a good investment for Candy’s business? Why or why not?

Rate of Return      = Average profit / Average investment   

  1. Assume the annual depreciation charge for the investment in Problem 1 (above) is $25,000. Determine the payback period for the investment.

Payback period = Total Investment / (Annual Depreciation + Annual Profit).

Based on the calculation, is this a good investment? Why or why not?

  1. With profit being 60% of sales, determine the break-even point in dollars for an investment with fixed costs of $100,000. How much revenue would the business need to generate, in order to break even (use one of the formulas below)

BEP in dollars = Fixed Costs/Profit as percentage of sales

BEP in units = Fixed costs/profit per unit

Solutions

Expert Solution

Rate of return is the percentage of return earned on the investment made by the company. Higher the rate of return, the better the investment
Rate of return Average profit/Average investment
Rate of return 30000/250000
Rate of return 12.00%
The rate of return is 12%.
Candy should invest in the project as rate of return is 12%.
Alternatively, candy should compare the rate of return with the cost of capital or her expected return so as as to make better decision to invest in the investment
Payback period is the number of years it takes for the project to recover the cash invested.
Payback period Total investment/(Annual depreciation + Annual profit)
Payback period 250000/(30000+25000)
Payback period 4.55 yrs
The payback period is 4.55 years
Annual depreciation (250000/10) 25000
Break even point is where the company would make no profit nor loss
BEP in dollars Fixed costs/Profit as percentage of sales
BEP in dollars 100000/60%
BEP in dollars $166,666.67
The business must generate revenue of $166,666.67

jeff jeffy answered 1 year ago
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