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 (currency is in thousands of yen, denoted by ¥): (Ignore income taxes.)


Purchase cost of the equipment ¥432,000
Annual cost savings that will be
provided by the equipment ¥90,000
Life of the equipment 12 years

Requirement 1:

(a) Compute the payback period for the equipment. (Round your answer to 1 decimal place.)

Payback period 4.8 years

(b)

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

NO

Requirement 2:

Use straight-line depreciation based on the equipment's useful life.

(a)

Compute the simple rate of return on the equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Simple rate of return % ??????

Explanation / Answer

Requirement 1:

(a) Compute the payback period for the equipment. (Round your answer to 1 decimal place.)

Payback period 4.8 years

(b)

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

NO


Requirement 2:

Use straight-line depreciation based on the equipment's useful life
= 432,000 / 12 = 36,000

(a)

Compute the simple rate of return on the equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Simple rate of return % 20.8

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