Adria Lopez is considering the purchase of equipment for Success Systems that wo
ID: 2584222 • Letter: A
Question
Adria Lopez is considering the purchase of equipment for Success Systems that would allow the company to add a new product to its coputer 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 striaght-line basis. Success Systems expects to sell 100 unit 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 answers as percents, rounded to one decimal.
Please help me figure out the TABLES
Cash Flow Analysis for Proposed Equipment Investment
Business Solutions'
Cash Flow Analysis - Equipment Investment
Expected Accrual Figures
Expected Net Cash Flows
Annual Sales
Costs
Materials, labor and overhead (no depreciation)
Depreciation of new equipment
Selling and Administrative Expenses
Pretax Income
Income tax
Net Income
Annual Net Cash Flows
7.1
As computed in table 14 with the data from the cash flow analysis in table 13: the payback period (PBP) for this equipment investment would be _____years.
The accounting rate of return (ARR) on this equipment investment would be _____%.
Payback Period and Accounting Rate of Return Calculations
PBP=
ARR=
Business Solutions'
Cash Flow Analysis - Equipment Investment
Expected Accrual Figures
Expected Net Cash Flows
Annual Sales
Costs
Materials, labor and overhead (no depreciation)
Depreciation of new equipment
Selling and Administrative Expenses
Pretax Income
Income tax
Net Income
Annual Net Cash Flows
Explanation / Answer
Cash Flow Analysis for Proposed Equipment Investment Business Solutions' Cash Flow Analysis - Equipment Investment Expected Accrual Figures Expected Net Cash Flows Annual Sales 375000 375000 Costs Materials, labor and overhead (no depreciation) 200000 200000 Depreciation of new equipment 50000 0 Selling and Administrative Expenses 37500 37500 Pretax Income 87500 137500 Income tax 26250 26250 Net Income 61250 Annual Net Cash Flows 111250 Accounting Rate of Return Net Return (after tax) 61250 Cost of equipment 300000 Rate of Return 20.40% Pay Back Period Cost of equipment 300000 EBIDTA (Earnings before depreciation and tax) 137500 Pay Back Period 45.8% per annum i.e. 2.2 years
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