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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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $375,000CostsMaterials, labor, and overhead (except depreciation) . . . . . . . 200,000Depreciation on new equipment . . . . . . . . . . . . . . . . . . . . . . . . 50,000Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . 37,500Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,500Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,500Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,250Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,250Required
Compute the
(1) Payback period and (2) Accounting rate of return for this equipment.
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