A piece of laborsaving equipment has just come onto the market that Mitsui Elect

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 $ 724,500 Purchase cost of the equipment Annual cost savings that will be provided by the equipment Life of the equipment $115,000 12 years Required 1-a. Compute the payback period for the equipment. Payback Period Choose Numerator:Choose Denominator:Payback Period -Payback period years 1-b. If the company requires a payback period of four years or less, would the equipment be purchased? Yes No 2-a. Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment's useful life Simple Rate of Return Choose Numerator: Choose Denominator: Simple Rate of Return Simple rate of returin

Explanation / Answer

Ans.1-a Payback period        =     Cost of equipment   /   Annual cost of savings 724500 / 115000 6.3 years Ans.1-b No, as the company's required payback period is four years which is less than 6.3 years, so the equipment would not be purchased. Ans.2-a Simple rate of return    =   Net operating income / Cost of equipment * 100 54625 / 724500 * 100 7.54% *Net operating income: Annual cost savings 115000 Less: Depreciation (724500 / 12) -60375 Net operating income 54625 *Depreciation = Cost of equipment / Life of equipment Ans.2-b No, the equipment would not be purchased as its minimum required rate of return is higher than its Simple rate of return.

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