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 $384,000 with a 10-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 153,600 units of the equipment’s product each year. The expected annual income related to this equipment follows. Sales $ 240,000 Costs Materials, labor, and overhead (except depreciation on new equipment) 84,000 Depreciation on new equipment 38,400 Selling and administrative expenses 24,000 Total costs and expenses 146,400 Pretax income 93,600 Income taxes (40%) 37,440 Net income $ 56,160 If at least an 9% return on this investment must be earned, compute the net present value of this investment. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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 $384,000 with a 10-year life and no salvage value. It will be
| Sales | $ | 240,000 | |
| Costs | |||
| Materials, labor, and |
84,000 | ||
| Depreciation on new equipment | 38,400 | ||
| Selling and administrative expenses | 24,000 | ||
| Total costs and expenses | 146,400 | ||
| Pretax income | 93,600 | ||
| Income taxes (40%) | 37,440 | ||
| Net income | $ | 56,160 | |
If at least an 9%
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