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.) Required: Compute the payback period for the equipment. (Round your answer to 2 decimal places.) Payback period | years If the company rejects all proposals with a payback period of more than 5 years, would the equipment be purchased? No Yes 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.) Simple rate of return % Would the equipment be purchased if the company's required rate of return is 5%? Yes No

Explanation / Answer

SOLUTION : 1.a  Payback period = (cost/annual saving) = (228000/38300) 5.953 YEARS 1.b. No as the project has more than 5 year PBP 2.a. Simple rate of return cost saving 38300 Less : depereciation (228000/12) -19000 net increased income 19300 cost of equipment 228000 rate of return (19300/228000) 8.46% 2b. Would the equipment be purchased if the company's required rate of return is 5% PV of annual cost saving (38300x8.8632) 339462.5 pv of cost 228000 NPV 111462.5 Since NPV IS POSITIVE, EQUIPMENT SHOULD BE PURCHASED

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