440000 52000 388000 7 388000 52000 336000 8 336000 52000 284000 9 284000 52000

440000 52000 388000 7 388000 52000 336000 8 336000

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