Exercise 10 4 straight line depreciation lo p1

Exercise 25-1 Payback period computation; uneven cash flows LO P1

Beyer Company is considering the purchase of an asset for $360,000. 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

$

80,000

$

50,000

$

70,000

$

250,000

$

13,000

$

463,000

Compute the payback period for this investment. (Cumulative net cash outflows must be entered with a minus sign. Round your answers to 2 decimal places.)

A machine can be purchased for $210,000 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 zero salvage value.

Year 1

Year 2

Year 3

Year 4

Year 5

Net incomes

$

13,000

$

28,000

$

53,000

$

40,500

$

103,000

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

Exercise 25-3 Payback period computation; even cash flows LO P1

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

a.

A new operating system for an existing machine is expected to cost $240,000 and have a useful life of four years. The system yields an incremental after-tax income of $69,230 each year after deducting its straight-line depreciation. The predicted salvage value of the system is $9,000.

b.

A machine costs $180,000, has a $13,000 salvage value, is expected to last seven years, and will generate an after-tax income of $38,000 per year after straight-line depreciation.

Exercise 25-4 Accounting rate of return LO P2

A machine costs $300,000 and is expected to yield an after-tax net income of $9,000 each year. Management predicts this machine has a 9-year service life and a $60,000 salvage value, and it uses straight-line depreciation. Compute this machine’s accounting rate of return. (Round your answer to 2 decimal places.)

Exercise 25-5 Payback period and accounting rate of return on investment LO 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 $480,000 with a 12-year life and no salvage value. It will be depreciated on a straight-line basis. The company expects to sell 192,000 units of the equipment’s product each year. The expected annual income related to this equipment follows.

Sales

$

300,000

Costs

Materials, labor, and overhead (except depreciation)

160,000

Depreciation on new equipment

40,000

Selling and administrative expenses

30,000

Total costs and expenses

230,000

Pretax income

70,000

Income taxes (30%)

21,000

Net income

$

49,000

Exercise 25-6 Computing net present value LO P3

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 $368,000 with a 4-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 147,200 units of the equipment’s product each year. The expected annual income related to this equipment follows. (PV of $1, FV of $1, PVA of $1, and FVA of $1) (Use appropriate factor(s) from the tables provided.)