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 $ 412,500 provided by the equipment Life of the equipment $ 75,000 10 years Required a. Compute the payback period for the equipment. avback Per 1 | Choose Denominator: Payback Period Annual net cash inflow | = | Payback period years Choose Numerator: nvestment required b. Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment's useful life Simple Rate of Retur Choose Numerator: Choose Denominator: Simple Rate of Return - Simple rate of return Annual incremental net operating income Initial investment

Explanation / Answer

a)Payback period= investment reqired/annual cash inflow
=(412500)/(75000)
=5,5 years
b)Rate of return= annual incrememtal net op income/initial investment
=(75000-(412500/10))/412500
=8.18%

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