Please assist. Thank you! Please assist. Thank you! B2B Co. is considering the p
ID: 2488770 • Letter: P
Question
Please assist. Thank you!
Please assist. Thank you! 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 $144,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 57,600 units of the equipment's product each year. The expected annual income related to this equipment follows. Compute the payback period. Compute the accounting rate of return for this equipment.Explanation / Answer
CALCULATION OF PAYBACK PERIOD PAYBACK PERIOD = INVESTMENT/CFAT 144000/24600 5.85 YEARS ALTERNATIVELY INVESTMENT = 144000 YEARS PATAX DEPRECIATION CFATAX CUMULATIVE CFATAX 1 12600 12000 24600 24600 2 12600 12000 24600 49200 3 12600 12000 24600 73800 4 12600 12000 24600 98400 5 12600 12000 24600 123000 6 12600 12000 24600 147600 7 12600 12000 24600 172200 8 12600 12000 24600 196800 9 12600 12000 24600 221400 10 12600 12000 24600 246000 11 12600 12000 24600 270600 12 12600 12000 24600 295200 PAYBACK PERIOD = 5YEARS +(144000-147600)/(144000-123000) 5.14 YEARS ACCOUNTING RATE OF RETURN ARR = (CFAT-DEPRECIATION)/NET INVESTMENT (24600-12000)/144000 0.0875 87.5 NOTE NET INVESTMENT = INVESTMENT-SALVAGE ARR = AVERAGE PROFIT AFTER TAX/NET INVESTMENT