Allison Aftercare operates a rehabilitation center for individuals with physical disabilities. The company is considering the purchase of a new piece of equipment that costs $750,000, has a life of five years, and has no salvage value. The company depreciates its assets on a straight-line basis. The expected annual cash flow on a before-tax basis for this piece of equipment is $250,000. Allison requires that an investment be recouped in less than fiveyears and have an accounting rate of return (pretax) of at least 18 percent.
a. Compute the payback period and the accounting rate of return for this piece of equipment (ignore taxes).
b. Is the equipment an acceptable investment for Allison? Explain.