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: $ 270,000 Purchase cost of the equipment Annual cost savings that will be provided by the equipment Life of the equipment $ 60,000 12 years Required: 1a. 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 15%? Complete this question by entering your answers in the tabs below. Reg 1A Reg 1B Reg 2A Reg 2B Compute the payback period for the equipment. (Round your answer to 1 decimal place.) Payback period years

Answer 1

Net income	64050
Add: Depreciation	57000
Annual net cash flows	121050
1a
Cost of Investment	270000
/ Annual net cash flows	60000
Payback period	4.5	years
b
NO, as payback period is greater than 4 years
2a
Annual net cash flows	60000
Less: Depreciation	22500	=270000/12
Annual net income	37500
Annual net income	37500
Divide by Investment cost	270000
Simple rate of return	13.9%
2b
NO, as return is less than 15%