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Southern Cola is considering the purchase of a special purpose bottling machine for $28,000. It is expected to have a useful life of 7 years
Southern Cola is considering the purchase of a special purpose bottling machine for $28,000. It is expected to have a useful life of 7 years with a zero terminal disposal price. The plant manager estimates the following savings in cash-operating costs: Year 1 Amount 10,000 8,000 6,000 5,000 4,000 3,000 3,000 Required 1. Compute the pay back period net of income taxes assuming a 40% tax rate using straight-line depreciation on the special purpose bottling machine 2. Compute the accrual accounting rate of return net of income taxes based on the net initial investment. Use the average annual savings in cash-operating costs when computing the numerator of the accrual accounting rate of return. Assume the straight line method is used when computing depreciation. (Assume a 40% income tax rate)
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