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

Payback Period: The payback period is a capital budgeting method which determines the time period…

Answered: Serial Problem Business Solutions LO…

EBK CFIN

6th Edition

ISBN:9781337671743

Author:BESLEY

Publisher:BESLEY

Chapter10: Project Cash Flows And Risk

Section: Chapter Questions

Problem 8PROB

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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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