82B Co. is considering the purchase of equipment that would allow the company to

Question

82B 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 $192,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 76,800 units of the equipment's product each year. The expected annual income related to this equipment follows. Sales Costs 120,000 Materials, labor, and overhead (except depreciation on new equipment) 64,000 16,000 Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income Income taxes (308) Net income 92,000 28,000 8.400 $ 19,600 1. Compute the payback period. 2. Compute the accounting rate of return for this equipment. Complete this question by entering your answers in the tabs below Required 1Required 2 Compute the payback period Pa Period Choose Choose Numerator: Payback Period Payback period Required 1 Required 2 >

Explanation / Answer

Payback Period Choose Numerator: / Choose Denominator: = Payback Period Cost of investment / Annual net cash flow = Payback period $192,000 / $35,600 = 5.39 years Accounting Rate of Return Choose Numerator: / Choose Denominator: = Accounting Rate of Return Annual after-tax net income / Annual average investment = Accounting rate of return $19,600 / $96,000 = 20.42%

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