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Q4E

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Financial & Managerial Accounting
Found in: Page 1085
Financial & Managerial Accounting

Financial & Managerial Accounting

Book edition 7th
Author(s) John J Wild, Ken W. Shaw, Barbara Chiappetta
Pages 1096 pages
ISBN 9781259726705

Short Answer

Refer to the information in Exercise 24-3 and assume instead that double-declining depreciation is applied. Compute the machine’s payback period (ignore taxes). (Round the payback period to three decimals.)

The payback period is 2.26 years.

See the step by step solution

Step by Step Solution

Step-by-Step SolutionStep 1 Computation of depreciation

Year

Beginning book value

Annual dep (1/5)*200% = 40%

Accumulated depreciation

Ending book value

1

$150,000

$60,000

$60,000

$90,000

2

90,000

36,000

96,000

54,000

3

54,000

21,600

117,600

32,400

4

32,400

12,960

130,560

19,440

5

$19,440

$7,776

$138,336

$11,664

Step 2 Computation of payback period.

Year

Net Income

Depreciation

Net cash flow

Cumulative cash flow

0

-$150,000

-$150,000

1

$10,000

$60,000

70,000

-80,000

2

25,000

36,000

61,000

-19,000

3

50,000

21,600

71,600

52,600

4

37,500

12,960

50,460

103,060

5

$100,000

$7,776

$107,776

$210,836

The payback period is between 2 and 3

The payback period will be 2.26 years.

Most popular questions for Business-studies Textbooks

Cortino Company is planning to add a new product to its line. To manufacture this product, the company needs to buy a new machine at a $300,000 cost with an expected four-year life and a $20,000 salvage value. All sales are for cash and all costs are out-of-pocket, except for depreciation on the new machine. Additional information includes the following.

Expected annual sales of new product . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,150,000

Expected annual costs of new product

Direct materials . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300,000

Direct labor . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 420,000

Overhead (excluding straight-line depreciation on new machine) . . . . . . . . . . . . . . 210,000

Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100,000

Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30%

Required

1. Compute straight-line depreciation for each year of this new machine’s life. (Round depreciation amounts to the nearest dollar.)

2. Determine expected net income and net cash flow for each year of this machine’s life. (Round answers to the nearest dollar.)

3. Compute this machine’s payback period, assuming that cash flows occur evenly throughout each year. (Round the payback period to two decimals.)

4. Compute this machine’s accounting rate of return, assuming that income is earned evenly throughout each year. (Round the percentage return to two decimals.)

5. Compute the net present value for this machine using a discount rate of 7% and assuming that cash flows occur at each year-end. (Hint: Salvage value is a cash inflow at the end of the asset’s life.)

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