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: Purchase cost of the equipment Annual cost savings that will be provided by the equipment $ 484,500 $85,000 2 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? O Yes O No

Explanation / Answer

1A). Payback Period = Purchase Cost of Savings / Annual Savings
                               = 484500 / 85000 = 5.7 years

1B). If Company requires a payback period of 4years or less than the equipment should not be purchased.

2A) Simple Rate of Return = (Annual Savings - Depreciations) / Cost of Investment
                                       = (85000-40375)/484500 *100 = 9.21%

2B). No, the equipment should not be purchased if company's required rate of return is 14%.

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