Dobson Corp

question 8

Essay

Dobson Corp.is considering the purchase of a new piece of equipment.The cost savings from the equipment would result in an annual increase in net income of $50,000.The equipment will have an initial cost of $500,000 and have an 8-year life.There is no salvage value of the equipment.The hurdle rate is 10%.Ignore income taxes.Calculate the following:
a.Accounting rate of return
b.Payback period

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Definitions:

Break-even Sales

The amount of revenue needed to cover all fixed and variable costs, resulting in no profit or loss.

Variable Cost

Costs that change in proportion to the level of production or sales activity, such as raw materials and direct labor costs.

Fixed Costs

Fixed overheads that stay the same no matter how much is produced or sold, including rental fees or staff salaries.

Margin of Safety

The difference between actual or projected sales and the break-even point, indicating the amount by which sales can drop before a business incurs a loss.