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K2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected
K2B 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 $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 96,000 units of the equipment%u2019s product each year. The expected annual income related to this equipment follows. |
Sales | $ | 150,000 | |
Costs | |||
Materials, labor, and overhead (except depreciation) | 80,000 | ||
Depreciation on new equipment | 20,000 | ||
Selling and administrative expenses | 15,000 | ||
Total costs and expenses | 115,000 | ||
Pretax income | 35,000 | ||
Income taxes (30%) | 10,500 | ||
Net income | $ | 24,500 | |
| | ||
1. | Compute the payback period
2. Compute the accounting rate of return |
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