B2b co is considering the purchase of equipment that

4.
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 $360,000 with a 12-year life and no salvage value. It will be
depreciated on a straight-line basis. The company expects to sell 144,000 units of the equipment’s product
each year. The expected annual income related to this equipment follows.
Sales $ 225,000
Costs
Materials, labor, and overhead (except depreciation on
new equipment)
120,000
Depreciation on new equipment 30,000
Selling and administrative expenses 22,500
Total costs and expenses 172,500
Pretax income 52,500
Income taxes (30%) 15,750
Net income $ 36,750
1. Compute the payback period.
2. Compute the accounting rate of return for this equipment.

Accounting Rate of Return
Choose Numerator: / Choose Denominator: = Accounting Rate of Return
Annual after-tax net income / Annual average investment = Accounting rate of return
$36,750 / $180,000 = 20.42 %
5.
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 $360,000 with a 12-year life and no salvage value. It will be
depreciated on a straight-line basis. The company expects to sell 144,000 units of the equipment’s product
each year. The expected annual income related to this equipment follows. If at least an 8% return on this
investment must be earned, compute the net present value. ( FV of $1 , PV of $1 , FVA of $1 and PVA of
$1 ) (Use appropriate factor(s) from the tables provided.)