Question

A piece of laborsaving equipment has just come onto the market that Mitsui Electronics, Ltd., could use to reduce costs in one of its plants in Japan. Relevant data relating to the equipment follow:

Purchase cost of the equipment $ 378,000

Annual cost savings that will be provided by the equipment $ 70,000

Life of the equipment 12 years

Required:

PART1-a.

Compute the payback period for the equipment.

Payback Period
Choose Numerator:	/	Choose Denominator:	=	Payback Period
	/		=	Payback period
	/		=		years

PART1-b.

If the company requires a payback period of four years or less, would the equipment be purchased?

Yes

No

PART2-a.

Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment’s useful life.

Simple Rate of Return
Choose Numerator:	/	Choose Denominator:	=	Simple Rate of Return
	/		=	Simple rate of return
	/		=		%

Simple Rate of Return
Choose Numerator:	/	Choose Denominator:	=	Simple Rate of Return
	/		=	Simple rate of return
	/		=		%

PART 2-b.

Would the equipment be purchased if the company’s required rate of return is 16%?

	Yes
	No

Answer 1

1a) Payback period:

Payback Period Choose Numerator: / Choose Denominator: = Payback Period Purchase of equipment / Annual cost saving = Payback period 378000 / 70000 = 5.4 years

b)Payback period is higher than 4 years so equipment should not be purchases

2a) Simple rate of return :

Simple rate of return Choose Numerator: / Choose Denominator: = Simple rate of return Net income / Initial investment = Simple rate of return 38500 / 378000 = 10 %

2b) No,