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Question
Dracor Company 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 $280,000 with a 7-year life, no salvage value, and will be depreciated using straight-line depreciation. The expected annual income related to this equipment follows. Compute the (a) payback period and (b) accounting rate of return for this equipment.| Sales | $900,000 | ||
| Costs: | |||
| Manufacturing | $545,000 | ||
| Depreciation on machine | 40,000 | ||
| Selling and administrative expenses | 249,000 | (834,000 | ) |
| Income before taxes | 66,000 | ||
| Income tax (30%) | ( 19,800 | ) | |
| Net income | $ 46,200 | ||
Answer
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