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 $ 560,500 provided by the equipment Life of the equipment $95,000 10 years Required: 1-a. Compute the payback period for the equipment. Payback Period Choose Numerator: 1 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

1-a :- Payback period for equipment :-

560,500/95,000 = 5.9 years is the payback period.

1-b :- If the company requires payback period of four years or less the equipment will not be purchased since the annual cost of savings provided by the equipment was $95,000 which will result the payback period to be around 5.9 years.

2-a:- Simple rate of return will be

38,950/560,500*100 = 6.9% or 7% (if rounded off).

2-b:- The equipment will not be purchased if the companies required rate of return is 16% since the equipment could only yield a return of 7% approximately and there is a vast difference between the actual and the expected yield.

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