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B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected
B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $192,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 76,800 units of the equipments product each year. The expected annual income related to this equipment follows. |
Sales | $ | 120,000 | |
Costs | |||
Materials, labor, and overhead (except depreciation on new equipment) | 64,000 | ||
Depreciation on new equipment | 16,000 | ||
Selling and administrative expenses | 12,000 | ||
Total costs and expenses | 92,000 | ||
Pretax income | 28,000 | ||
Income taxes (30%) | 8,400 | ||
Net income | $ | 19,600 | |
1. | Compute the payback period. |
2. | Compute the accounting rate of return for this equipment. |
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