Question

xercise 24-8 Payback period and accounting rate of return on investment LO P1, P2

B2B Co. is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $120,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 48,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.

Sales	$	75,000
Costs
Materials, labor, and overhead (except depreciation on new equipment)		40,000
Depreciation on new equipment		10,000
Selling and administrative expenses		7,500
Total costs and expenses		57,500
Pretax income		17,500
Income taxes (40%)		7,000
Net income	$	10,500

1. Compute the payback period.
2. Compute the accounting rate of return for this equipment.

Compute the payback period.

Payback Period
Choose Numerator:	/	Choose Denominator:	=	Payback Period
	/		=	Payback period
			=

Compute the accounting rate of return for this equipment.

Accounting Rate of Return
Choose Numerator:	/	Choose Denominator:	=	Accounting Rate of Return
	/		=	Accounting rate of return

Required 1

Answer 1

1) Payback period :

Payback Period Choose Numerator: / Choose Denominator: = Payback Period Initial investment / Annual cash flow = Payback period 120000 / 20500 = 5.85   years

Accounting rate of return :

  

Accounting Rate of Return
Choose Numerator:	/	Choose Denominator:	=	Accounting Rate of Return
Net income	/	Average investment	=	Accounting rate of return
10500	/	60000		17.5	%