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.)

   

  

If the company rejects all proposals with a payback period of more than 4 years, would the equipment be purchased?

Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment’s useful life.(Round your answer to 1 decimal place.)

Martin Company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment follows: (Ignore income taxes.)

Explanation / Answer

SOLUTION :

1.a  Payback period = (cost/annual saving) = (204000/38300)

5.33 YEARS

1.b. No as the project has more than 4 year PBP

2.a. Simple rate of return

cost saving

38300

Less : depereciation (204000/12)

-17000

net increased income

21300

cost of equipment

204000

rate of return (213000/204000)

10.44%

2b. Would the equipment be purchased if the company's required rate of return is 11%

PV of annual cost saving (38300x6.492356)

        248,657.24

pv of cost

        204,000.00

NPV

          44,657.24

Since NPV IS POSITIVE, EQUIPMENT SHOULD BE PURCHASED

1.a  Payback period = (cost/annual saving) = (204000/38300)

5.33 YEARS

1.b. No as the project has more than 4 year PBP

2.a. Simple rate of return

cost saving

38300

Less : depereciation (204000/12)

-17000

net increased income

21300

cost of equipment

204000

rate of return (213000/204000)

10.44%

2b. Would the equipment be purchased if the company's required rate of return is 11%

PV of annual cost saving (38300x6.492356)

        248,657.24

pv of cost

        204,000.00

NPV

          44,657.24

Since NPV IS POSITIVE, EQUIPMENT SHOULD BE PURCHASED

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