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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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