Chapter 24: Q1SP (page 1093)
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 \(300,000 and to have a six-year life and no salvage value. It will be depreciated on a straight-line basis. Business Solutions expects to sell 100 units of the equipment’s product each year. The expected annual income related to this equipment follows.
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \)375,000
Costs Materials, labor, and overhead (except depreciation) . . . . . . . . . . . . . . 200,000
Depreciation on new equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,500
Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,500
Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,500
Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,250
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,250
Required Compute the (1) payback period and (2) accounting rate of return for this equipment. (Record ARR answers as percents, rounded to one decimal.)
Short Answer
The payback period is 2.7 years and the accounting rate of return is 40.84%.
Step by step solution
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