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

Question

xercise 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 $120,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 48,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.

1. Compute the payback period.
2. Compute the accounting rate of return for this equipment.

Compute the payback period.

Compute the accounting rate of return for this equipment.

Required 1

Sales $ 75,000 Costs Materials, labor, and overhead (except depreciation on new equipment) 40,000 Depreciation on new equipment 10,000 Selling and administrative expenses 7,500 Total costs and expenses 57,500 Pretax income 17,500 Income taxes (40%) 7,000 Net income $ 10,500

Explanation / Answer

1) Payback period :

Accounting rate of return :

  

Payback Period Choose Numerator: / Choose Denominator: = Payback Period Initial investment / Annual cash flow = Payback period 120000 / 20500 = 5.85   years

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