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 $ 329,000   Annual cost savings that will be     provided by the equipment $ 70,000   Life of the equipment 10 years    

Required: 1-a. Compute the payback period for the equipment.      

   1-b. If the company requires a payback period of four years or less, would the equipment be purchased? Yes No

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

   2-b. Would the equipment be purchased if the company’s required rate of return is 14%? Yes No

Answer 1