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    Pay back period,accounting rate of return

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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
    decimal places.)
    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

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    Solution Summary

    The solution contains the selection of equipment by using pay back method and accounting rate of return.