Santana Rey is considering the purchase of equipment for Business Solutions that would allow the...
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 line. The equipment is expected to cost $413,000 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 equipment's product each year. The expected annual income related to this equipment follows.
| Sales | $385,000 |
| Costs | |
| Materials, labor, and overhead (except depreciation) | 197,000 |
| Depreciation on new equipment | 59,000 |
| Selling and administrative expenses | 37,500 |
| Total costs and expenses | 293,500 |
| Pretax income | 91,500 |
| Income taxes (35%) | 32,025 |
| Net income | $59,475 |
Required:
(1) Compute the payback period.
(2) Compute the accounting rate of return for this equipment.
Payback Period and Accounting Rate of Return:
The capital budgeting techniques such as net present value method, profitability index method, internal rate of return method, payback period method, accounting rate of return method etc are used to assess a given project or investment. The accounting rate of return method uses net income for calculations while other methods use net cash flows for calculations.
Answer and Explanation: 1
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View this answerAnswer to (1)
The net annual cash flow is given by:
- = Net income + depreciation on the equipment
- = $59,475 + $59,000
- = $118,475
The payback period...
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Payback Analysis: Formula & Example
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Chapter 16 / Lesson 12
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Payback analysis is performed by a business to determine when the amount of an investment will be returned. Understand the formula used in payback analysis and learn how to apply this using examples.
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