Santana Rey is considering the purchase of equipment for Business Solutions 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. Business Solutions 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. Report ARR in percent, rounded to one decimal.
Santana Rey is considering the purchase of equipment for Business Solutions 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
Business Solutions 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
percent,
rounded to one decimal.
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