137.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 machine40,000
Selling and administrative expenses249,000(834,000)
Income before taxes 66,000
Income tax (30%) (19,800)
Net income $46,200
138.Trevoline Company is deciding between two projects. Each project requires an initial investment of $350,000. The projected net cash flows for the two projects are listed below. The revenue is to be received at the end of each year. Trevoline requires a 10% return on its investments. The present value of an annuity of 1 and present value of an annuity factors for 10% are presented below. Use net present value to determine which project should be pursued and explain why.
PeriodsProject A
Cash FlowsProject B
Cash FlowsPresent Value
of 1 at 10%Present Value of an
Annuity of 1 at 10%
1$50,000$160,0000.90910.9091
2$200,000$175,0000.82641.7355
3$250,000$175,0000.75132.4869