Accounting 225 Quiz Section #17

Chapter 13-2 Class Exercises

1. Fremont CPA Tax Services is considering investing in two different types of tax
software that will result in cost savings for their business. The investment outflows
associated with their investment options are:
Software Option 1:
Year
Investment Cash Inflow
1
40000
2000
2
5000
4000
3
6000
4
8000
5
10000
6
10000
7
8000
8
8000
9
6000
10
6000

Software Option 2:
Year
Investment Cash Inflow
1
25000
2000
2
2000
3
4000
4
5000
5
6000
6
6000
7
5000
8
3000
9
3000
10
3000

a) Calculate the payback period for each of these options. Based on payback period,
which tax software should Fremont select?

b) What other considerations should Fremont make and which option would you
recommend?

Accounting 225 Quiz Section #17

Chapter 13-2 Class Exercises
2. Wallingford MicroBrew is considering the purchase of an automated bottling machine
for $80,000. The machine would replace an old piece of equipment that costs $33,000
per year to operate. The new machine would cost $10,000 per year to operate. The old
machine could be sold for a scrap value of $5,000. The new machine would have a
useful life of 10 years (straight line depreciation) and has no salvage value. Compute the
simple (accounting) rate of return on the new bottling machine

3. Blue Ridge Furniture is considering the purchase of two different items of equipment:
Machine A: New machine on the market that compresses sawdust into various shelving
products. Currently sawdust is disposed of as a waste product. Information on this
machine is as follows:
a. The machine costs $780,000 and would have a 25% salvage value at the end of its 10year useful life (straight line depreciation).
b. The shelving products produced by the machine would generate revenues of $350,000
per year. Variable manufacturing costs would be 20% of sales revenue.
c. Fixed annual expenses with the new shelving products would be: advertising $42,000;
salaries $86,000; utilities $9,000; insurance $13,000.
Machine B: This is a new machine that would automate a sanding process that is
primarily done by hand. The following information is available about this machine is:
a. The machine costs $220,000 and would have no salvage value at the end of its 10year useful life (straight line depreciation).
b. Several old pieces of sanding equipment that are fully depreciated would be disposed
of at a scrap value of $7,200.
c. The new machine would provide substantial annual savings in cash operating costs.
It would require an operator at an annual salary of $26,000 and $3,000 of annual

Accounting 225 Quiz Section #17

Chapter 13-2 Class Exercises
maintenance expense. The current, hand operated sanding procedure costs the
company $85,000 per year.
Blue Ridge Furniture requires a simple rate of return of 16% on all equipment purchases.
Also, the company will not purchase equipment unless the equipment has a payback
period of four years or less.
For machine A:
a) Prepare and income statement showing the expected Net Operating Income each year
for the new shelving products (use contribution margin format).

b) Compute simple rate of return.

c) Compute payback period.

Accounting 225 Quiz Section #17

Chapter 13-2 Class Exercises
For machine B:
a) Compute simple rate of return.

b) Compute payback period.

According to the companys criteria, which machine should they purchase?