Check my work 3 Santana Rey is considering the purchase of equipment for Busines
ID: 2436406 • Letter: C
Question
Check my work 3 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 $354,000 and to have a six-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 16.68 points Sales Costs $380,000 eBook Print References Materials, labor, and overhead (except depreciation) 196,000 59,000 33,000 288,000 92,000 27,600 $ 64,400 Depreciation on new equipment Selling and administrative expenses Total costs and expenses Pretax income Income taxes (30%) Net income Required (1) Compute the payback period. Payback Period Choose Denominator: Choose Numerator Payback Period Payback period Cost of investment Annual net cash flow 354,000Explanation / Answer
Answer:
1
Payback period
Choose Numerator:
/
Choose Denominator:
=
Payback period
Cost of investment
/
Annual Cash flow
=
Payback period
354,000
$123,400
=
$2.87
Year
Working notes for the above answer is as under
Calculation for Annual Cash flow
Sales
380,000
Costs
Materials, labor, and overhead (except depreciation)
196000
Depreciation on new equipment .
59000
Selling and administrative expenses . . .
33000
Total costs and expenses
288000
Pretax income .
92,000
Income taxes (30%) . .
27600
Net income
64,400
Add: depreciation
59000
Net cash flow
123,400
___________________________________________________
2
Accounting rate of return
Choose Numerator:
/
Choose Denominator:
=
Accounting rate of return
Annual after tax income
/
Average Investment
=
Accounting rate of return
64400
177000
36.4%
Working notes for the above answer is as under
Calculation of Average Investment
Cost
354000
Salvage
0
Sum
354000
Average (Sum/2) (354000/2)
177000
Payback period
Choose Numerator:
/
Choose Denominator:
=
Payback period
Cost of investment
/
Annual Cash flow
=
Payback period
354,000
$123,400
=
$2.87
Year