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 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
(2) Accounting rate of return for this equipment. (Record answers as percents, rounded to one decimal.)