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: $ 448,000 Purchase cost of the equipment Annual cost savings that will be provided by the equipment Life of the equipment $ 80,000 10 years Required: 1-a. Compute the payback period for the equipment. Payback Period Choose Denominator: Choose Numerator: = Payback Period Payback period years Payback period 1-b. If the company requires a payback period of four years or less, would the equipment be purchased? Yes No 2-a. Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment's useful life. Simple Rate of Return Choose Denominator: Choose Numerator: Simple Rate of Return Simple rate of return 2-b. Would the equipment be purchased if the company's required rate of return is 13%? Yes O No

Answer 1

1.a)
Payback Period
Choose Numerator:	/	Choose Denominator	=	Payback Period
Purchase cost of the equipment or Initial Investment Amount	/	Annual Cash Inflow	=	Payback Period
$448,000	/	$80,000	=	5.6 years
1.b)
No, it should not purchase as the payback period is higher than required period of 4 years
2.a)
Simple Rate of Return
Choose Numerator:	/	Choose Denominator	=	Simple Rate of Return
Annual incremental net operating income	/	Initial Investment	=	Simple Rate of Return
$35,200	/	$448,000	=	7.86%
Annual incremental net operating income =   Annual Cost Savings (-) Annual Depreciation                                                                                        =   $80,000 (-) ($448,000 / 10years)                                                                                        = $80,000 (-) $44,800                                                                                        =    $35,200
2.b)
No,the equipment would not be purchased because its 7.86% rate of return is less than the company's 13% required rate of return.