Martin Company is considering the purchase of a new piece of equipment. Relevant

Question

Martin Company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment follows: (Ignore income taxes.) Compute the payback period for the equipment. (Round your answer to 1 decimal place.) lf the company requires a payback period of 5 years or less, would the equipment be purchased? No Yes Use straight-line depreciation based on the equipment's useful life. Compute the simple rate of return on the equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.) Would the equipment be purchased if the company's required rate of return is 11%? Yes No

Explanation / Answer

1.a Payback period = Purchase cost / annual cost of saving

= 231,000/38,800

= 5.95

1.b No as the payback period is more than 5 years that is 5.95

2.a deprciation staright line = $231,000/ 11 = $21,000

Simple rate of return = (cost saving - depreciation )/ initial investment

= ( 38,800- 21,000)/ 231,000

= 7.71%

2.b No as the rate of return is 7.71% which is less that required rate of return that is 11%

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