Adriana Lopez is considering the purchase of equipment for Success Systems that would allow the company to

Question:

Adriana Lopez is considering the purchase of equipment for Success Systems that would allow the company to add a new product to its computer furniture line. The equipment is expected to cost $300,000 and to have a six-year life and no salvage value. It will be depreciated on a straight-line basis. Success Systems expects to sell 100 units of the equipment’s product each year. The expected annual income related to this equipment follows.

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $375,000

Costs

Materials, labor, and overhead (except depreciation) . . . . . . . 200,000

Depreciation on new equipment . . . . . . . . . . . . . . . . . . . . . . . . 50,000

Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . 37,500

Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,500

Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,500

Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,250

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,250

Required

Compute the

(1) Payback period and

(2) Accounting rate of return for this equipment.


Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important...
Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...
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Managerial Accounting

ISBN: 978-0073379586

2010 Edition

Authors: John J. Wild, Ken W. Shaw

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