PLEASE ANSWER ALL PARTS TO THE QUESTION! THANK YOU! Basic Payback Period and Sim

Question

PLEASE ANSWER ALL PARTS TO THE QUESTION! THANK YOU!

Basic Payback Period and Simple Rate of Return Computations [L013-1, L013-6] 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: Required: Compute the payback period for the equipment. lf the company requires a payback period of four years or less, would the equipment be purchased? Yes No Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment's useful life. Would the equipment be purchased if the company's required rate of return is 15%? Yes No

Explanation / Answer

1a)

Incremental cash flow = savings in cost from labour incentive production technique

Pay back period = initial investment / annual savings = $724500 / $115000 = 6.3 years

1b) As the payback period is 6.3 years, if the company wants the payback period to be 4 years or less, the equipment should not be purchased

2a) net annual income from using the machine

= savings in cost for using the machine - depreciation

= $115000 - $724500 / 12 = $54625

Simple rate of return

= increase in net annual income / (initial investmnet - salvage value)

=$54625 / $724500

= 7.54%

2b) no. The company should not purchase the equipment as the simple rate of return is less than 15%.

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