Exercise 24-8 Payback period and accounting rate of return on investment LO P1,

Question

Exercise 24-8 Payback period and accounting rate of return on investment LO P1, P2 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 $168,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 67,200 units of the equipment's product each year. The expected annual income related to this equipment follows Sales Costs $105,000 Materials, labor, and overhead (except depreciation on new equipment) Depreciation on new equipment Selling and administrative expenses 56,000 14,000 0,500 Total costs and expenses 80,500 Pretax income Income taxes (40%) 24,500 9,800 Net income S 14,700 1 Compute the payback period. Payback Period Choose Numerator: Choose Payback Perlod Payback period Denominator

Explanation / Answer

Answer 1

Net cash flow = Net Income + Depreciation = $14,700 + $14,000 = $28,700

Payback Period

Answer 2

Average cost of Investment = (Cost of investment - Salvage value) / 2 = $168,000 / 2 = $84,000

Accounting rate of return

Choose Numerator / Choose Denominator = Payback Period Cost of investent /   Net cash flow Payback Period $168,000 / $28,700 5.85 years

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