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 $299,000 provided by the equipment Life of the equipment 65,000 10 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 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 Ratn

Explanation / Answer

1(a) The payback period for the Equipment is 4.6 Years

Pay back period   = Investment required / Annual cost savings

                             = $299000 / $65000

                             = 4.6 Years

1(b)- No

No . The equipment would not be purchased Since the payback period (4.6 years) exceeds the company's required payback period (4.0 years).

2(a)- Simple rate of return would be 11.74%

Annual cost savings                                   $65000

Less:Depreciation ($299000/10)                 $29900

Annual operating income                                     $35100

Simple rate of return = Annual operating income / Cost of Equipment

=$35100 / 299000

= 11.74%

2(b)-No

No, the equipment would not be purchased. Since its 11.74% rate of return is less than the company's required rate of return of 16%.

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