Reference no: EM131540022

Question: Santana Rey is considering the purchase of equipment for Business Solutions that would allow the company to add a new product to its computer furniture line. The equipment is expected to cost $300,000 and to have a six-year life and no salvage value. It will be depreciated on a straight-line basis. Business Solutions expects to sell 100 units of the equipment's product each year. The expected annual income related to this equipment follows.

Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $375,000

Costs
Materials, labor, and overhead (except depreciation) . . . . . . . . . 200,000

Depreciation on new equipment . . . . . . . . . . . . . . . . . . . . . . . . 50,000

Selling and administrative expenses . . . . . . . . . . . . . . . . . . . . . . 37,500

Total costs and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287,500

Pretax income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,500

Income taxes (30%) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,250

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,250

Required: Compute the

(1) payback period and

(2) accounting rate of return for this equipment. (Record answers as percents, rounded to one decimal.)