1. A company is trying to decide which of two new product lines to introduce in the coming year. The predicted revenue and cost data for each product line follows:
Product A Product B
Sales 80,000 96,000
Direct Materials 3,000 6,000
Direct Labor 30,000 45,000
Other cash operating expenses 7,500 9,000
New equipment costs 75,000 100,000
Estimated useful life (no salvage) 5 years 5 years
The company has a 30% tax rate, it uses the straight-line depreciation method, and it predicts that cash flows will be spread evenly throughout each year. Calculate each product's payback period. If the company requires a payback period of three years or less, which, if either, product should be chosen?
2. A company purchases a machine for $1,000,000. The machine has an expected life of 9 years and no salvage value. The company anticipates a yearly net income of $60,000 after taxes of 30% to be received uniformly throughout each year. What is the accounting rate of return?