Serial Problem Business Solutions LO P1, P2Santana 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 $371,000 and to have a seven-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) 195,000 Depreciation on new equipment 53,000 Selling and administrative expenses 30,000 Total costs and expenses 278,000 Pretax income 97,000 Income taxes (40%) 38,800 Net income$58,200   Required:(1) Compute the payback period. Payback PeriodChoose Numerator:/Choose Denominator:=Payback Period/=Payback period =0 (2) Compute the accounting rate of return for this equipment.Accounting Rate of ReturnChoose Numerator:/Choose Denominator:=Accounting Rate of Return/=Accounting rate of return0

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Asked May 12, 2019
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Serial Problem Business Solutions LO P1, P2

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 $371,000 and to have a seven-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)   195,000  
Depreciation on new equipment   53,000  
Selling and administrative expenses   30,000  
Total costs and expenses   278,000  
Pretax income   97,000  
Income taxes (40%)   38,800  
Net income $ 58,200  
 

 
Required:
(1) Compute the payback period.

 

Payback PeriodChoose Numerator:/Choose Denominator:=Payback Period/=Payback period =0

 

(2) Compute the accounting rate of return for this equipment.

Accounting Rate of ReturnChoose Numerator:/Choose Denominator:=Accounting Rate of Return/=Accounting rate of return0

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Expert Answer

Step 1

Payback Period:

 

The payback period is a capital budgeting method which determines the time period required to recover the amount invested in an investment. It is the easiest method to evaluate an investment proposal. Formula to calculate the Payback Period is as follows:

 

Accounting Rate of Return:

 

Accounting rate of return (ARR) is a capital budgeting method which measures the effectiveness of an investment. It determines the Average rate of return or an annual rate of return from an investment. Formula to calculate ARR is as follows:

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Step 2

1.

 

Given:

The initial investment is $371,000.

Net income is $58,200.

Depreciation is $53,000.

Calculation of Payback period:

 

Thus, the payback period of new equipment is 3.34 years.

 

Working note:

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Step 3

2.

 

Calculation of the accounting rate of return (ARR):

 

 

Note: Here we are taking initial in...

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