A piece of labor-saving equipment has just come onto the market that Mitsui Elec

Question

A piece of labor-saving equipment has just come onto the market that Mitsui Electronics, Ltd, could use to reduce costs in one of ts plants in Japan. Relevant data relating to the equipment follow Purchase cost of the equipment Annual cost savings that will be $600,00 provided by the equipment Life of the equipment $100,800 12 years Required 1a. Compute the payback period for the equipment. 1b. If the company requires a payback period of four years or less, would the equipment be purchased? 2a. Compute the simple rate of return on the equipment Use straight-line depreciation based on the equipments useful life. 2b, would the equipment be purchased if the company's required rate of return is 12%? Complete this question by entering your answers in the tabs below. Req 18 Req 2A Req 28 Req 1A Compute the payback period for the equipment. (Round your answer to 1 decimal place.) Payback Pen Years

Explanation / Answer

1 (a) Payback period = $6,00,000 / $1,00,000 = 6 years (b) No, the the equipment would not be purchased because the payback period (6 years) exceeds the company maximum payback period time(4 years). 2 (a) The simple rate of return would be computed follows: Annual cost saving = $1,00,000 Less: Annual Depreciation ($6,00,000 / 12 years) = $ 50,000 Annual incremental net operating income = $ 50,000 Simple rate of return = Annual incremental net operating income / Initial Investment = $50,000 / $6,00,000 = 8.33% (b) No, the the equipment would not be purchased because it's 8.33% rate of return is less than the company's 12% required rate of return.

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