Question
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
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)
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