A piece of laborsaving equipment has just come onto the market that Mitsui Elect
ID: 2493127 • Letter: A
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:
A: Compute the payback period for the equiptment
B: If the company requires a payback period of four years or less, would the equipment be purchased?
C: Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment’s useful life.
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:
Explanation / Answer
A: Compute the payback period for the equiptment
Payback period for the equiptment = Purchase cost of the equipment/Annual cost savings that will be
provided by the equipment
Payback period for the equiptment = 392000/80000
Payback period for the equiptment = 4.90 years
B: If the company requires a payback period of four years or less, would the equipment be purchased?
No the equipment would not be purchased as its payback period is higher than minimum requirement
C: Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment’s useful life.
Annual Depreciation = (Cost-salvage Value)/useful life
Annual Depreciation = (392000-0)/10
Annual Depreciation = 39200
Incremental Annual Net Income = Annual cost savings - Annual Depreciation
Incremental Annual Net Income = 80000-39200
Incremental Annual Net Income = 40800
Simple rate of return on the equipment. = Incremental Annual Net Income /Initial Investment
Simple rate of return on the equipment. = 40800/392000
Simple rate of return on the equipment. = 10.41%
D:Would the equipment be purchased if the company’s required rate of return is 16%?
No the equipment would not be purchased as its Simple rate of return is lower than company’s required rate of return is 16%
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