Dracor Company Is Considering the Purchase of Equipment That Would

question 5

Essay

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.
$\begin{array}{|l|l|l|}\hline \text { Sales } & & \$ 900,000 \\\hline \text { Costs: } & & \\\hline \text { Manufacturing } & \$ 545,000 & \\\hline \text { Depreciation on machine } & 40,000 & \\\hline \text { Selling and administrative expenses } & 249,000 & (834,000) \\\hline \text { Income before taxes } & & 66,000 \\\hline \text { Income tax }(30 \%) & & \underline{(19,800} )\\\hline \text { Net income } & & \$ 46,200 \\\hline\end{array}$

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Definitions:

Focused Differentiation

A business strategy where a company targets a specific market segment, offering specialized products or services that uniquely meet the needs of that segment.

Rapid Product Development

A strategy aimed at accelerating the design, creation, and launch of new products to market through streamlined processes.

Mission Statement

A structured overview detailing the goals and principles of a business, entity, or individual.

Product/Service Quality

The measure of how well a delivered product or service meets the customer's expectations.