5. Houston Oil, a small oil equipment company, purchased a new petroleum drilling rig for $2,500,000. Houston Oil will depreciate it using MACRS decpreciation (petroleum drilling equipment is considered a 5-year property). The drilling rig has been leased to the ACME Corporation which will pay Houston Oil $750,000 per year for 8 years. After 8 years the drilling rig will belong to ACME Corporation. Houston Oil has a 28% combined tax rate (federal and state).

(a) Compute the (i) BTRR and (ii) the ATRR

(b) Houston Oil considers a 20% after-tax rate of return as acceptable. Is this investment acceptable?