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).