Appendix 2) Ellis & Associates operates a rehabilitation center for individu¬ als with physical disabilities. The company is considering the purchase of a $1,200,000 piece of equipment that has a five-year life and no salvage value. The company depreciates assets on a straight-line basis. The expected an¬ nual cash flow on a before-tax basis for this equipment is $400,000. Ellis re¬ quires that an investment be recouped in less than five years and have a pre-tax accounting rate of return of at least 18 percent.

a. Compute the payback period and accounting rate of return for this equipment.

b. Is the equipment an acceptable investment for Ellis? Explain.

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