Question

A piece of labor-saving 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 provided by the equipment Life of the equipment $494,000 $ 95,000 10 years Required: a. Compute the payback period for the equipment 1b. If the company requires a payback period of four years or less, would the equipment be purchased? 2a. Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment's useful life. 2b. Would the equipment be purchased if the company's required rate of return is 14%? Complete this question by entering your answers in the tabs below. Req 1A Req 1B Req 2A Req 2B Compute the payback period for the equipment. (Round your answer to 1 decimal place.) Payback period |уears Req 1A Req 1B

Answer 1

1a) Payback period = Initial investment/Annual cash flow = 494000/95000 = 5.2 years

1b) No, equipment should not purchased

2a) Simple rate of return = Net income/Initial investment = 45600/494000 = 9.2%

2b) No, equipment should not purchased