Question

A piece of laborsaving equipment has just come onto the market that Mitsui Electronics LTK. Could use to reduce the costs in one of its plants in Japan. Relevant data relating to the equipment follow: Purchase cost of the equipment $484,500 Anmual cost savings that will be provided by the equipment $85,000 Life of the equipment 12 years Compute the payback period for the equipment

Choose numerator choose denominator ________________/____________ = payback period

Choose numerator choose denominator = _______ / __________ = _____ years 1-b If the company requires a payback period of four years or less, would the equipment be purchased? (yes or nO)

2-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 Choose numerator choose denominator = _______ / __________ = _____ %

2-b would the equipment be purchased if the company’s required rate of return is 14%.

Answer 1

1a) Compute the payback period for the equipment

Choose numerator	/	Choose denominator	=	Payback period
Initial investment	/	Annual cost saving	=	Payback period
484500	/	85000	=	5.7 years

1b) No, Equipment should not be purchased

2a) Compute the simple rate of return for the equipment

Choose numerator	/	Choose denominator	=	Simple rate of return
Net income	/	Initial investment	=	Simple rate of return
85000-(484500/12)	/	484500	=	9.21%

2b) No, Equipment should not be purchased