Exercise 24-8 Payback period and accounting rate of return on investmentP1P2

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 $360,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 144,000 unitsof the equipments product each year. The expected annual income related to this equipment follows. Compute the(1) paybackperiod and (2) accountingrate of return for this equipment.

You will need to look in your textbook for the additional information.

Computing net cash flows from net income

	Net income	Cash flows
Sales...............................................................
Materials, labor & overhead.............................
Depreciation....................................................
Selling and administrative................................
Pretax income..................................................
Income taxes (30%)..........................................
Net income......................................................
Net cash flows.................................................

1. Payback Period (show calculations)

2. Accounting Rate of Return (show calculations)

$225,000 Sales .. Costs Materials, labor, and overhead (except depreciation on new equipment)... Depreciation on new equipment... Selling and administrative expenses Total costs and expenses... Pretax income. Income taxes (30%) ........... 120,000 30,000 22,500 172,500 52,500 15,750 $ 36,750 Net income.............................. .... ... 11' r 2 40 RPC concludes that it mus