Santana Rey is considering the purchase of equipment for Business Solutions that

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 $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 $ 377,000 Costs Materials, labor, and overhead (except depreciation) 196,000 Depreciation on new equipment 50,000 Selling and administrative expenses 35,500 Total costs and expenses 281,500 Pretax income 95,500 Income taxes (40%) 38,200 Net income $ 57,300 Required: Compute the payback period. (Round your answer to 1 decimal place.) Payback period years Compute the accounting rate of return for this equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.) Accounting rate of return %

Explanation / Answer

(a) Net cashflow = 57300 + 50000 = $107300 Payback period = 300000/107300 = 2.8 years (b) Accounting rate of return = 57300/(300000/2) = 38.2% Hope this helps!

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