Exercise 24-5 Payback period computation; even cash flows LO P1

Compute the payback period for each of these two separate investments:

a.

A new operating system for an existing machine is expected to cost $240,000 and have a useful life of five years. The system yields an incremental after-tax income of $69,230 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $9,000.

b.

A machine costs $210,000, has a $13,000 salvage value, is expected to last eight years, and will generate an after-tax income of $38,000 per year after straight-line depreciation

Exercise 24-7 Accounting rate of return LO P2

A machine costs $400,000 and is expected to yield an after-tax net income of $9,000 each year. Management predicts this machine has a 9-year service life and a $80,000 salvage value, and it uses straight-line depreciation. Compute this machines accounting rate of return.

Exercise 24-8 Payback period and accounting rate of return on investment LO P1, P2

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 $384,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 153,600 units of the equipments product each year. The expected annual income related to this equipment follows.

Sales	$	240,000
Costs
Materials, labor, and overhead (except depreciation on new equipment)		128,000
Depreciation on new equipment		32,000
Selling and administrative expenses		24,000
Total costs and expenses		184,000
Pretax income		56,000
Income taxes (40%)		22,400
Net income	$	33,600

Exercise 24-5 Payback period computation; even cash flows LO P1 Compute the payback period for each of these two separate investments: a. A new operating system for an existing machine is expected to cost $240,000 and have a useful life of five years. The system yields an incremental after-tax income of $69,230 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $9,000. b. A machine costs $210,000, has a $13,000 salvage value, is expected to last eight years, and will generate an after-tax income of $38,000 per year after straight-line depreciation. Payback Period Choose Numerator: 1 Choose Denominator: 1 Payback Period Payback period 0 a. b. = 0 Exercise 24-7 Accounting rate of return LO P2 A machine costs $400,000 and is expected to yield an after-tax net income of $9,000 each year. Management predicts this machine has a 9-year service life and a $80,000 salvage value, and it uses straight-line depreciation. Compute this machine's accounting rate of return. Accounting Rate of Return Choose Denominator: Choose Numerator: = 1 1 Accounting Rate of Return Accounting rate of return 0 Exercise 24-8 Payback period and accounting rate of return on investment LO P1, P2 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 $384,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 153,600 units of the equipment's product each year. The expected annual income related to this equipment follows. $ 240,000 Sales Costs Materials, labor, and overhead (except depreciation on new equipment) Depreciation on new equipment Selling and administrative expenses Total costs and expenses 128,000 32,000 24,000 184,000 Pretax income Income taxes (40%) 56,000 22,400 Net income $ 33,600 1. Compute the payback period. Payback Period Choose Numerator: 1 Choose Denominator: = / Payback Period Payback period 0 = 2. Compute the accounting rate of return for this equipment. Accounting Rate of Return Choose Denominator: Choose Numerator: 1 = = Accounting Rate of Return Accounting rate of return 0