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: $484,500 Purchase cost of the equipment Annual cost savings that will be provided by the equipment Life of the equipment $ 85,000 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 14%? Complete this question by entering your answers in the tabs below. Req 1A Reg 1B Req 2A Req 2B Compute the payback period for the equipment. (Round your answer to 1 decimal place.) Payback Period Years

Answer 1

1a
Investment cost	484500
Divide by Annual cash flows	85000
Payback period	5.7	years
1b
NO, as payback period is more than 4 years
2a
Annual Depreciation	40375	=484500/12
Annual net income	44625	=85000-40375
Divide by Investment cost	484500
Simple rate of return	9.2%
2b
NO, as simple rate of return is less than 14%