Adria Lopez is considering the purchase of equipment for Success Systems that would allow the company to add a new product to its computer 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 straight-line basis. Success Systems expects to sell 100 units of the equipments 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 |
|
1. Compute the payback period (**fill in the chart and explain answers**)
| Pay Back Period |
| Cost of investment: |
/ |
Annual net cash flow: |
Pay Back Period |
| 1) |
|
2) |
3) |
2. Compute the accounting rate of return for this equipment. (**fill in the chart and explain answers**)
| Accounting Rate of Return |
| Annual after- tax net income: |
/ |
annual average investment: |
Accounting Rate of Return |
| 4) |
|
5) |
6) |
|
|