Serial Problem Business Solutions L.O. P1, P2 Santana Rey is considering the pur

Question

Serial Problem Business Solutions L.O. P1, P2

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 $348,000 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%u2019s product each year. The expected annual income related to this equipment follows.

Compute the payback period. (Round your answer to 1 decimal place.)

Compute the accounting rate of return for this equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

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 $348,000 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%u2019s product each year. The expected annual income related to this equipment follows.

Explanation / Answer

Hi,

Please find the answers as follows:

Part A:

Annual Cash Flows = Net Income + Depreciation = 58500 + 58000 =116500

Payback Period = Initial Investment/Annual Cash Flows = 348000/116500 = 2.9 Years

Part B:

Accounting Rate of Return = Average Net Income/Average Investment = 58500/(348000)/2*100 = 33.6%

Thanks.

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