A piece of laborsaving equipment has just come onto the market that Mitsui Elect
ID: 2594568 • Letter: A
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.
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:
Explanation / Answer
Payback period calculation is the simple calcualtion for checking the return of our Basis investment in year CACULATION OF DISCOUNTED PPAYBACK PERIOD Answer =1 Period Particulars Inflow (Outflow) Cumulative Value 0 Outflow $ -3,60,000.00 $ -3,60,000.00 1 Annual Cost Saving $ 75,000.00 $ -2,85,000.00 2 Annual Cost Saving $ 75,000.00 $ -2,10,000.00 3 Annual Cost Saving $ 75,000.00 $ -1,35,000.00 4 Annual Cost Saving $ 75,000.00 $ -60,000.00 5 Annual Cost Saving $ 75,000.00 $ 15,000.00 6 Annual Cost Saving $ 75,000.00 $ 90,000.00 7 Annual Cost Saving $ 75,000.00 $ 1,65,000.00 8 Annual Cost Saving $ 75,000.00 $ 2,40,000.00 9 Annual Cost Saving $ 75,000.00 $ 3,15,000.00 10 Annual Cost Saving $ 75,000.00 $ 3,90,000.00 11 Annual Cost Saving $ 75,000.00 $ 4,65,000.00 12 Annual Cost Saving $ 75,000.00 $ 5,40,000.00 In the 3rd year we recover our all money , but full 3rd year is not required for this so we can caluclate the exact period of payback Amoutn required from the 5th years = $ 60,000.00 Payback Period = 4 Years + $ 60,000.00 "/ " By $ 75,000.00 Payback Period = 4 Years + 0.80 Years Payback Period = 4.80 Years Answer = 1 (A) = Payback Period = 4.80 Years Answer = 1 (B) If the companies required payback period is 4 years or less then company will not purchase the equipment because the payback period of equipment is 4.8 years which is greter then required. Answer 2(A) Calculation of the simple rate of return Investment amount = $ 3,60,000 Annual Cost Saving = $ 75,000 Less : Depreciation per year = $ 30,000 ( $ 360,000 / 12 Years) Net Saving Per Year = $ 45,000 Total Saving = $ 45,000 X 12 Years = $ 5,40,000 Rate of Return = Total Return (Saving) / Investment Amount Rate of Return = $ 540,000 / $ 360,000 Rate of Return = 150% Answer = 2(B) Calculation of Discounted return @ 15% present Value Years Cash inflow/ Outflow PVF @ 15% Present Value 0 $ -3,60,000 1 $ -3,60,000 1 $ 75,000 0.8696 $ 65,217 2 $ 75,000 0.7561 $ 56,711 3 $ 75,000 0.6575 $ 49,314 4 $ 75,000 0.5718 $ 42,881 5 $ 75,000 0.4972 $ 37,288 6 $ 75,000 0.4323 $ 32,425 7 $ 75,000 0.3759 $ 28,195 8 $ 75,000 0.3269 $ 24,518 9 $ 75,000 0.2843 $ 21,320 10 $ 75,000 0.2472 $ 18,539 11 $ 75,000 0.2149 $ 16,121 12 $ 75,000 0.1869 $ 14,018 Total $ 46,546 Net present value is the positive with PVF @ 15% so the equipment will be purhcase Answer = Yes
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