Adria Lopez is considering the purchase of equipment for Success Systems that wo
ID: 2600346 • Letter: A
Question
Adria Lopez is considering the purchase of equipment for Success Systems that would allow the to add a new product to its computer fumiture line. The equipment is expected to cost $264,000 and to have a six-year life and no salvage value. It will be depreciated on a straight-line basis Success Systems expects to sell 100 units of the equipment's product each year. The expected annual income related to this equipment follows S384,000 196.000 44,000 Sales Costs Materials, labor, and overhead (except depreciation) Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income 37,000 277.000 107,000 Income taxes (35%) 37.450 Net income $ 69.550 6. Using the information above for Adria Lopez Company, compute the payback period 7. Using the information above for Adria Lopez Company, compute the accounting rate of returm for this equipment. 8 Assuming Adria Lopez Company requires a 10% return on its investments, what is the Net Present Value (NPV) of the project. (Please refer to the NPV charts)Explanation / Answer
6.
Cash inflow per year = Net income + Depreciation
= 69,550 + 44,000
Cash inflow per year = $113,550
Year
Inflow per year
Cumulative Cash inflow
1
113,550
113,550
2
113,550
227,100
3
113,550
340,650
4
113,550
454,200
5
113,550
567,750
6
113,550
681,300
As we can see that we will receive $264,000 between 2 and 3 years
Payback period = Initial cash outflow / Cash inflow per year
= 2 Years + [(264,000 - 227,100)/113,550]
= 2 Years + 0.32 Years
Payback period = 2.32 Years
7.
Accounting Rate of Return = Average Profit / Average Investment
As we know that the Net income and Initial investment is same for all years so the average of them will also same of 1 year.
Accounting Rate of Return = $69,550 / $264,000
Accounting Rate of Return = 26.34%
8.
NPV = Present value of Cash inflows – Initial Cash Outflow
PVAF @10% for 6 Years = 4.355
Present Value of cash inflows = Cash inflow per year * PVAF @10% for 6 Years
= 113,550 * 4.355
= $494,510.25
NPV = $494,510.25 - $264,000
NPV = $230,510.25
Year
Inflow per year
Cumulative Cash inflow
1
113,550
113,550
2
113,550
227,100
3
113,550
340,650
4
113,550
454,200
5
113,550
567,750
6
113,550
681,300
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