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 $456,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 182,400 units of the equipment's product each year. The expected annual income related to this equipment follows. $ 285,000 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 (30%) Net income 152,000 38,000 28,500 218,500 66,500 19,950 $ 46,550 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 accounting rate of return for this equipment. Accounting Rate of Return Choose Denominator: Choose Numerator: = = Accounting Rate of Return Accounting rate of return 0 < Required 1 Required 2 RE >

Answer 1

1
Payback Period
Choose Numerator:	/	Choose Denominator:	=	Payback Period
Cost of investment	/	Annual net cash flow	=	Payback period
$456,000	/	$84,550	=	5.39	years
2
Accounting Rate of Return
Choose Numerator:	/	Choose Denominator:	=	Accounting Rate of Return
Annual after-tax net income	/	Annual average investment	=	Accounting rate of return
$46,550	/	$228,000	=	20.42%
3
Chart Values are Based on:
n =	10
i =	9%
Select Chart	Amount	x	PV Factor	=	Present Value
Present Value of an Annuity of 1	$100,596	x	6.4177	=	$645,595
Present value of cash inflows					645595
Present value of cash outflows					(371,200)
Net present value					274,395