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B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $320,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 128,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.
| Sales | $ | 200,000 | |
| Costs | |||
| Materials, labor, and overhead (except depreciation) | 107,000 | ||
| Depreciation on new equipment | 26,667 | ||
| Selling and administrative expenses | 20,000 | ||
| Total costs and expenses | 153,667 | ||
| Pretax income | 46,333 | ||
| Income taxes (40%) | 18,533 | ||
| Net income | $ | 27,800 | |
| 1. | Compute the payback period.
|
Expert Answer
1.
| Payback Period | ||||
| Choose Numerator: | / | Choose Denominator: | = | Payback Period |
| Cost of investment | / | Annual net cash flow | = | Payback period |
| $320,000 | / | $54,467 | = | 5.9 years |
2.
| Accounting Rate of Return | ||||
| Choose Numerator: | / | Choose Denominator: | = | Accounting Rate of Return |
| Annual after-tax net income | / | Annual average investment | = | Accounting rate of return |
| $27,800 | / | $160,000 | = | 17.38% |
