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Exercise 11-5: Payback period and accounting rate of return on investment L.O. P1, 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 six-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. (Omit the "%" sign which is provided for you. Round your answer to 2
Sales $ 225,000
Materials, labor, and overhead (except depreciation) 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
The solution contains the selection of equipment by using pay back method and accounting rate of return.