Compute this machine accounting rate of return
Question 1 - A machine costs $300,000 and is expected to yield an after-tax net income of $9,000 each year. Management predicts this machine has a 8-year service life and a $60,000 salvage value, and it uses straight-line depreciation. Compute this machine's accounting rate of return.
Question 2 - Beyer Company is considering the purchase of an asset for $220,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year.
|
|
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
Total |
|
Net cash flows |
$63,000 |
$34,000 |
$63,000 |
$150,000 |
$27,000 |
$337,000 |
Compute the payback period for this investment.
Question 3 - 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 $360,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 144,000 units of the equipment's product each year. The expected annual income related to this equipment follows.
|
Sales |
$225.000 |
|
Costs |
|
|
Materials, labor, and overhead (except depreciation on new equipment) |
120,000 |
|
Depreciation on new equipment |
30,000 |
|
Selling and administrative expenses |
22,500 |
|
Total costs and expenses |
172, 500 |
|
Pretax income |
52,500 |
|
Income taxes (40%) |
21,000 |
|
Net income |
$ 31,500 |
Required -
1. Compute the payback period.
2. Compute the accounting rate of return for this equipment.
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