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.