A piece oflabor saving equipment has just come onto the mark

A piece oflabor 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 $640, 500 provided by the equipment Life of the equipment $105, 000 10 years Required la. Compute the payback period for the equipment. tb. 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 13%? Complete this question by entering your answers in the tabs below. Req 1A Req 18 Req 2A Req 2B Compute the payback period for the equipment. (Round your answer to 1 decimal place.) Period Years

Solution

1a. Payback period = Initial investment/Annual cost savings = $640500/$105000 = 6.1 years

1b. No. Since the actual payback is 6.1 years against the desired payback of 4 years or less.

2a. Simple rate of return = Annual net income/Initial investment = $40950/$640500 = 6.39%

Annual depreciation = $640500/10 years = $64050

Annual net income = $105000 - $64050 = $40950

2b. No. Since the actual rate of return is lower than the required rate of return of 13%

Note: The simple rate of return is rounded off to 2 decimal places in the absence of instructions regarding the same.