Adriana Lopez is considering the purchase of equipment for Success Systems that would allow the company to
Question:
Adriana 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 and
(2) Accounting rate of return for this equipment.
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
Step by Step Answer:
Computing net cash flows from net income Net income Cash fl...View the full answer
