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 $312,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 124,800 units of the equipment's product each year. The expected annual income related to this equipment follows Sales Costs $195,000 Materials, labor, and overhead (except depreciation on new equipment) 104,000 26,000 19,500 Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income Income taxes (40%) Net income 149,500 45,500 18,200 $ 27,300 1. Compute the payback period. Payback Peri Choose Numerator: | 1 | Choose Denominator: Payback Period Payback period | 2. Compute the accounting rate of return for this equipment. Accounting Rate of Return Choose Numerator: Choose Denominator: Accounting Rate of Return Accounting rate of return

Explanation / Answer

1 Payback Period Choose Numerator: / Choose Denominator: = Payback Period Cost of investment / Annual net cash flow = Payback period 312000 / 53300 = 5.85 years Accounting Rate of Return Choose Numerator: / Choose Denominator: = Accounting Rate of Return Annual after-tax net income / Annual average investment = Accounting rate of return 27300 / 156000 = 17.50 %

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