Reference no: EM133159027

Question - B Company 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 $230,000 with a 7-year life, no salvage value, and will be depreciated using straight-line depreciation. The expected annual income related to this equipment follows.

Sales $900,000

Costs: Manufacturing costs $545,000

Depreciation on machine 40,000

Selling and administrative expenses 249,000 (834,000)

Income before taxes 66,000

Income tax (30%) (19,800)

Net income $46,200

Required -

a) Calculate the payback period.

b) Calculate the amounting rate of return for this equipment.

c) Briefly explain the meaning of present value, and why the fact that these methods don't consider present value makes the results less useful.