440000 52000 388000 7 388000 52000 336000 8 336000

440,000        52,000     388,000
7.
388,000        52,000     336,000
8.
336,000        52,000     284,000
9.
284,000        52,000     232,000
10.
232,000        52,000     180,000
Exercise 25-2
Accounting rate of return
P2
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 6-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. Compute the (1) payback period and
(2) accounting rate of return for this equipment.
Exercise 25-3
Payback period and
accounting rate of return
on investment
P1 P2
Check (1) 5.39 years (2)
20.42%
$380,000 - $20,000
8

225,000
172,500
15,750
36,750
225,000 – 30,000 = 195,000
Payback period = Cost of investment
Annual net cash flow
Accounting rate of return = Annual after-tax net income
Annual average investment
Payback period = 225,000 = 6.1
36,750
C
OMPUTING NET CASH FLOWS FROM NET INCOME
Net income Cash flows
Sales ....................................................................... $225,000 $225,000
Materials, labor & overhead .................................... 120,000 120,000
Depreciation ............................................................ 30,000
Selling and administrative ....................................... 22,500 22,500
Pretax income ......................................................... 52,500
Income taxes (30%) ................................................ 15,750 15,750
Net income .............................................................. $ 36,750
Net cash flows ......................................................... $ 66,750

1. Payback period = = 5.39 years
2. Accounting rate of return = = 20.42%
*Average investment
Cost ......................................................... $360,000
Salvage ................................................... 0