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:

  

If the company requires a payback period of four years or less, would the equipment be purchased?

Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment’s useful life.

        

  Purchase cost of the equipment $ 600,000   Annual cost savings that will be
    provided by the equipment $ 100,000   Life of the equipment 12 years 1-a. Compute the payback period for the equipment. Payback Period Choose Numerator: / Choose Denominator: = Payback Period / = Payback period / = years 1b.

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 return / = %

        

2-b. Would the equipment be purchased if the company’s required rate of return is 12%? Yes No

Explanation / Answer

1a Investment required/ Annual net cash inflow = Payback period 600000/100000 = 6 years b No 2a Annual incremental net operating income=100000-(600000/12)= $50000 Annual incremental net operating income/Initial investment=Simple rate of return 50000/600000= 8.3% or 8.33% b No

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