Question

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equi pment 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. $120,000 Sales Costs Materials, labor, and overhead (except depreciation on new equipment) Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income Income taxes (50%) 64,000 16,000 12,000 92,000 28,000 14,000 $ 14,000 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 2 Required 1 Compute the payback period. Payback Period Payback Period Payback period Choose Choose Numerator: Denominator:

Answer 1

Solution 1:

Annual cash inflows = Net income + Depreciation = $14,000 +$16,000 = $30,000

Payback period
Choose Numerator	/	Choose Denominator	=	Payback Period
Initial Investment	/	Annual Cash inflows	=	Payback Period
$192,000.00	/	$30,000.00	=	6.40	Years

Solution 2:

Accounting rate of return
Choose Numerator	/	Choose Denominator	=	Accounting rate of return
Net Income	/	Initial investment	=	Accounting rate of return
$14,000.00	/	$192,000.00	=	7.3%