Question

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 $120,000 with a 12-year life and no salvage value. It will be depreciated on a straight-ine basis. The company expects to sell 48,000 units of the equipment's product each year. The expected annual income related to this equipment follows. 75,000 Sales Costs Materials, labor, and overhead (except depreciation on new equipment) Depreciation on new equipment Selling and administratlive expenses Total costs and expenses 40,000 10.000 7.500 57.500 17.500 Pretax income Income taxes (50% ) 8.750 8,750 Net income 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 1 Required 2 Compute the payback period. Payback Period Choose Numerator:Choose Denominator: Payback Period Payback period Required 1 Required 2

Answer 1

Question 1:

Requirement 1:

Net Annual Cash Inflow = Net Income + Depreciation

= $8,750 + $10,000

= $18,750

Payback Period = Cost of equipment / Net Annual Cash flow

= $120,000 / $18,750

= 6.4 years

Requirement 2:

Accounting rate of Return = Net Profits / Initial Investment

= $8,750 / $120,000

= 0.0729 i.e. 7.29%

Question 2:

Cost of equipment = $371,200

Life of equipment = 10 years

Rate of return = 9%

Net Annual Cash Inflow = Net Income + Depreciation

= $54,408 + $37,120

= $91,528

Net Present Value = (Net Annual Cash Inflow * Annuity factor of 9% for 10 years) - Initial Investment in equipment

Net Present Value = ($91,528 * 6.4176577) - $371,200

= $589,395 - $371,200

= $216,195