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 its plants in Japan. Relevant data relating to the equipment follow: Purchase cost of the equipment Annual cost savings that will be $425,000 provided by the equipment Life of the equipment $ 85,000 10 years Compute the payback period for the equipment. (Round your answer to 1 decimal place.) Payback Period Years If the company requires a payback period of four years or less, would the equipment be purchased? OYes ONo 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 i.e. 0.123 should be considered as 12.3%.) Simple Rate of Return would the equipment be purchased if the company's required rate of return is 12%? OYes ONo

Explanation / Answer

1 Payback period = 425000/85000= 5 years 2 No 3 Annual net income=85000-(425000/10)= $42500 Simple rate of return = 42500/425000 = 10% 4 No

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