Managerial Accounting 1B Ch24

Compute the payback period for each of these two separate investments:

a.

A new operating system for an existing machine is expected to cost $260,000 and have a useful life of five years. The system yields an incremental after-tax income of $75,000 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $10,000. (Round your answer to 2 decimal places.)

  Payback period

b.

A machine costs $190,000, has a $10,000 salvage value, is expected to last nine years, and will generate an after-tax income of $30,000 per year after straight-line depreciation. (Round your answer to 1 decimal place.)

  Payback period

Wenro Company is considering the purchase of an asset for $90,000. It is expected to produce the following net cash flows. The cash flows occur evenly throughout each year.

Year 1

Year 2

Year 3

Year 4

Year 5

Total

  Net cash flows

$

30,000

$

20,000

$

30,000

$

60,000

$

19,000

$

159,000

Compute the payback period for this investment. (Round your intermediate calculations to 3 decimal places and final answer to 1 decimal place.)

  Payback period

A machine can be purchased for $300,000 and used for 5 years, yielding the following net incomes. In projecting net incomes, double-declining balance depreciation is applied, using a 5-year life and a $50,000 salvage value.

Year 1

Year 2

Year 3

Year 4

Year 5

  Net incomes

$

20,000

$

50,000

$

100,000

$

75,000

$

200,000

Compute the machine’s payback period (ignore taxes). (Round your intermediate calculations to 3 decimal places and final answer to 2 decimal places.)

  Payback period

A machine costs $500,000 and is expected to yield an after-tax net income of $15,000 each year. Management predicts this machine has a 10-year service life and a $100,000 salvage value, and it uses straight-line depreciation. Compute this machine’s accounting rate of return. (Omit the "%" sign in your response.)

  Accounting rate of return

K2B 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 $240,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. K2B Co. concludes that it must earn at least a 8% return on this investment. The company expects to sell 96,000 units of the equipment’s product each year. The expected annual income related to this equipment follows. (Use Table B.3)

  Sales

$

150,000

  Costs

     Materials, labor, and overhead (except depreciation)

80,000

     Depreciation on new equipment

20,000

     Selling and administrative expenses

15,000

  Total costs and expenses

115,000

  Pretax income

35,000

  Income taxes (30%)

10,500

  Net income

$

24,500

Compute the net present value of this investment. (Round "PV Factor" to 4 decimal places. Round your intermediate calculations and final answer to the nearest dollar amount. Omit the "$" sign in your response.)