Question

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 $250,000 and to have a five-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. $ 375,000 Sales Costs Materials, labor, and overhead (except depreciation) Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income Income taxes (40%) Net income 193,000 50,000 30,500 273,500 101,500 40,600 $ 60,900 Required: (1) Compute the payback period. Payback Period Choose Denominator: Choose Numerator: Payback Period Payback period

Answer 1

Answer :-

(1) Calculation of Payback Period are as follows :-

Payback Period
Choose Numerator	/	Choose Denominator	=	Payback Period
Cost of Investment	/	Annual net cash flow	=	Payback Period
$250,000	/	$110,900	=	2.25	years

Explanation :-

Given,

Cost of Investment =$250,000

Annual net cash flow = Net income + Depreciation

Net Income = $60,900

Depreciation = $50,000

Annual net cash flow = $60,900 + $50,000 = $110,900

Payback Period = Cost of Investment /Annual net cash flow

Payback Period = $250,000 / $110,900 =2.25 years

2)Calculation of the accounting rate of return are as follows :-

Accounting Rate of Return
Choose Numerator	/	Choose Denominator	=	Accounting rate of return
Annual after tax net income	/	Cost of investment	=	Accounting Rate of Return
$60,900	/	$250,000		24.36	%

Explanation :-

Given,

Annual after tax net income = $60,900

Cost of Investment = $250,000

Accounting rate of return = Annual after tax net income /Cost of Investment

Accounting Rate of Return = $60,900 / $250,000 = 0.2436 or 24.36%