Question

In: Finance

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

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

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?

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 11 months ago

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