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 furniture
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 $343,000 and to have a seven-year life and no salvage value. It will be depreciated on a straight-line basis. Business Solutions expects to sell 100 units of the equipments product each year. The expected annual income related to this equipment follows.
Sales | $ | 379,000 | |
Costs | |||
Materials, labor, and overhead (except depreciation) | 198,000 | ||
Depreciation on new equipment | 49,000 | ||
Selling and administrative expenses | 36,500 | ||
Total costs and expenses | 283,500 | ||
Pretax income | 95,500 | ||
Income taxes (30%) | 28,650 | ||
Net income | $ | 66,850 | |
Required: (1) Compute the payback period.
(2) Compute the accounting rate of return for this equipment.
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