A piece of laborsaving equipment has just come onto the market that Mitsui Elect

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

Compute the payback period for the equipment.

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

No

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

Required:

Explanation / Answer

1a) Payback period:

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

2a) Simple rate of return :

2b) No,

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

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