Dracor Company Is Considering the Purchase of Equipment That Would

Dracor Company is considering the purchase of equipment that would allow the company to add a new product to its line. The equipment is expected to cost $280,000 with a 7-year life, no salvage value, and will be depreciated using straight-line depreciation. The expected annual income related to this equipment follows. Compute the (a) payback period and (b) accounting rate of return for this equipment.
$\begin{array}{|l|l|l|}\hline \text { Sales } & & \$ 900,000 \\\hline \text { Costs: } & & \\\hline \text { Manufacturing } & \$ 545,000 & \\\hline \text { Depreciation on machine } & 40,000 & \\\hline \text { Selling and administrative expenses } & 249,000 & (834,000) \\\hline \text { Income before taxes } & & 66,000 \\\hline \text { Income tax }(30 \%) & & \underline{(19,800} )\\\hline \text { Net income } & & \$ 46,200 \\\hline\end{array}$