Problem 13-27 Simple Rate of Return and Payback Analysis of Two Machines (LOS, LO6] Blue Ridge Furniture is considering purchasing two different items of equipment, as described below: 20 points 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: eBook a. The machine would cost $780,000 and would have a 25% salvage value at the end of its 10-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 $350,000 per year. Variable manufacturing costs would be 20% of sales. c. Fixed annual expenses associated with the new shelving products would be advertising, $42,000; salaries, $86,000; utilities, $9,000; and insurance, $13,000. References 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 would cost $220,000 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 $7,200. C. The new sanding machine would provide substantial annual savings in cash operating costs. It would require an operator at an annual salary of $26,000 and $3,000 in annual maintenance costs. The current, hand-operated sanding procedure costs the company $85,000 per year. Blue Ridge Furniture requires a simple rate of return of 16% 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.) Required: 1. For Machine A: a. Prepare an income statement showing the expected net operating income each year from the new shelving products. 20 points eBook Fixed expenses: References Total fixed expenses b. Compute the simple rate of return. (Round your answer to 1 decimal place.) Simple rate of return c. Compute the payback period. Payback period Years 2. For Machine B: a. Compute the simple rate of return. Simple rate of return b. Compute the payback period. (Round your answer to 1 decimal place.) Payback period Years 3. According to the company's criteria, which machine, if either, should the company purchase? O Machine A O Machine B