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:

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:

$ 600,000 Purchase cost of the equipment Annual cost savings that will be provided by the equipment Life of the equipment $ 100,000 12 years Required: 1-a. Compute the payback period for the equipment. Payback Period 1. Choose Denominator: Choose Numerator: = = Payback Period Payback period years ILI 1-b. If the company requires a payback period of four years or less, would the equipment be purchased? O Yes ? ??

Explanation / Answer

1(a) The payback period for the Equipment is 6 Years

Pay back period   = Investment required / Annual cost savings

= $6,00,000 / $1,00,000

= 6 Years

Numerator          = $6,00,000

Denominator        = $1,00,000

Payback Period    = 6 Years             

1(b)- No

No . The equipment would not be purchased Because,the payback period (6 years) exceeds the company's required payback period (4.0 years).

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