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SP 25 Santana Rey is considering the purchase

Price: $2.50


SP 25 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.)

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