Serial Problem Business Solutions LO P1, P2 Santana Rey is considering the purch

Question

Serial Problem Business Solutions LO P1, P2 Santana Rey is considering the purchase of equipment for Business Solutions that would allow the company to add a new product to its computer furniture line. The equipment is expected to cost $324,000 and to have a six-year life and no salvage value. It will be depreciated on a straight-line basis. Business Solutions expects to sell 100 units of the equipment's product each year. The expected annual income related to this equipment follows Sales Costs $ 376,000 Materials, labor, and overhead (except depreciation) 191,000 54,000 33,500 278,500 97,500 29,250 $ 68,250 Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income Income taxes (30%) Net income

Explanation / Answer

Depreciation expense =Cost / useful life

                = 324000/6

                = $ 54000

1)Payback period = Initial investment /Annual cash flow

       = 324000 / 122250

       = 2.65 years

**Annual cash flow =Net income +depreciation

= 68250 + 54000

= 122250

2) Average investment =[beginning book value +ending book value]/2

         =[324000+0]/2

        = 162000

Accounting rate of return = net income /Average investment

               = 68250 / 162000

               = .4213 or 42.13%

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