ORode Furniture is considering the purchase of two different items of equipment, as described below:

Machine A. A machine has just come onto the market that compresses sawdust into various shelving products.Currently, the sawdust is disposed of as a waste product. The following information is available about the machine:

a.

The machine would cost $408,000 and would have a 10% salvage value at the end of its 12-year useful life. The company uses straight-line depreciation and considers salvage value in computing depreciation deductions.

b.

The shelving products produced by the machine would generate revenues of $310,000 per year. Variable manufacturing costs would be 16% of sales.

c.

Fixed annual expenses associated with the new shelving products would be: advertising, $39,000; salaries, $106,000; utilities, $4,900; and insurance, $600.

Machine B. A second machine has come onto the market that would automate a sanding process that is now done largely by hand. The following information is available about this machine:

a.

The new sanding machine cost $172,000 and would have no salvage value at the end of its 10-year useful life. The company would use straight-line depreciation.

b.

Several old pieces of sanding equipment that are fully depreciated would be disposed of at a scrap value of $9,500.

c.

The new sanding machine would provide substantial annual savings in cash operating costs. It would require an operator at an annual salary of $15,150 and $4,800 in annual maintenance costs. The current, hand-operated sanding procedure costs the company $86,000 per year.

ORode Furniture requires a simple rate of return of 17% on all equipment purchases. Also, the company will not purchase equipment unless the equipment has a payback period of four years or less. (Ignore income taxes.)

11. value: 30.00 points Required information

2.

For Machine B:

a.

Compute the simple rate of return. (Round your answer to 1 decimal place.)

Simple rate of return %

b.

Compute the payback period. (Round your answer to 1 decimal place.)

Payback period years

12. value: 30.00 points Required information

3.

Based on the simple rate of return, which machine, if either, should the company purchase?

Machine A Machine B