Question
Santana Rey is considering the purchase of equipment for Business Solutions that would allow the company to add a new product to its computer
Santana Rey is considering the purchase of equipment for Business Solutions that would allow the company to add a new product to its computer furniture line. The equipment is expected to cost $288,000 and to have a six-year life and no salvage value. It will be depreciated on a straight-line basis. Business Solutions expects to sell 100 units of the equipment's product each year. The expected annual income related to this equipment follows. Sales $378,000 Costs Materials, labor, and overhead (except depreciation) 194,000 Depreciation on new equipment 48,000 Selling and administrative expenses 36,000 Total costs and expenses 278,000 Pretax income 100,000 Income taxes (35%) 35,000 Net income $ 65,000 Required: (1) Compute the payback period. Payback Period Choose Numerator: Choose Denominator: = 100 Payback Period Payback period (2) Compute the accounting rate of return for this equipment. Choose Numerator: / Accounting Rate of Return Choose Denominator: Accounting Rate of Return Accounting rate of return
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