The Star Co. is expanding its production facilities to include a new product line, a sporty automobile tire rim. Because of a new type of machine, tire rims can be produced with little labor cost. The controller has advised management about two machines that could do the job. The details about each machine are presented below:

Sun Machine Moon Machine

Estimated annual increase in income 3,820,100 3,792,500

Purchase price 3,900,000 4,100,000

Salvage value 390,000 410,000

Traceable annual costs:

Materials 1,754,000 1,608,000

Direct labor 212,000 369,000

Electrical power 49,800 49,800

Factory supervision 157,500 157,500

Factory supplies 251,500 237,500

Other factory overhead 313,200 402,500

Estimated useful life 8 years 12 years

The company uses the straight line depreciation method and is in the 30% tax bracket. Their minimum desired after tax rate of return is 16%. The minimum payback period is five (5) years.

Questions:

1. Compute the company's net income after tax arising from each alternative.
2. For each machine. Compute the projected Accounting Rate of Return.
3. Compute the Payback Period of each machine.
4. From the information generated in no. 2 and 3., which machine should be purchased? Why?