Apple Enterprises is looking at buying a machine that would allow the TYM Enterprises to add a new product. The
cost of the machine will be $432,000 with a 12-year life, will be depreciated using a straight line method and no salvage value. TYM Enterprise will sell 172,800 units of the machine’s product annually. The below shows the machine’s expected annual income.
Sales$270,000 Costs Materials, labor, and overhead (except depreciation on new equipment) 144,000 Depreciation on new equipment 36,000 Selling and administrative expenses 27,000 Total costs and expenses 207,000 Pretax income 63,000 Income taxes (30%) 18,900 Net income$44,100
1. Compute the payback period.
2. Compute the accounting rate of return for this equipment.