K2B Co. is considering the purchase of equipment that would allow the company to add a new

Question:

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

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,...