1. A machine costs $500,000 and is expected to yield an after tax net income of $15,000 each year. Management predicts this machine has a 10 year service life and a $100,000 salvage value, and it uses straight line depreciation. Compute this machine’s accounting rate of return.
2. K2B 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 $240,000 with a 12 year life and no salvage value. It will be depreciated on a straight line basis. The company expects to sell 96,000 units of the equipment’s product each year. The expected annual income related to this equipment follows. Compute the (1) payback period and (2) accounting rate of return for this equipment.
|
Sales |
$150,000 |
|
Costs |
|
|
Materials, labor, and overhead (except depreciation) |
80,000 |
|
Depreciation on new equipment |
20,000 |
|
Selling and administrative expenses |
15,000 |
|
Total costs and expenses |
115,000 |
|
Pretax income |
35,000 |
|
Income taxes (30%) |
10,500 |
|
Net income |
$ 24,500 |