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 12-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. Check (1) 5.39 years, (2) 20.42% Sales . $225,000 Costs Materials, labor, and overhead (except depreciation on new equipment) . 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
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
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 12-year life and no salvage value. It will be
each year. The expected annual income related to this equipment follows. Compute the (1) payback period
and (2) accounting
Check (1) 5.39 years,
(2) 20.42%
Sales . $225,000
Costs
Materials, labor, and
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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