200 points Exercise 1110 Basic Payback Period and Simple Rat

2.00 points Exercise 11-10 Basic Payback Period and Simple Rate of Return Computations LO11-1, LO11-4] A piece of laborsaving equipment has just come onto the markt that Mitsu reduce costs in one of its plants in Japan. Relevant data relating to the equipment Electons ??.cold use to Purchase cost of the equipment Annual cost savings that will be provided by the equipment Life of the equipment $ 329,000 s 70,000 10 years Required: 1-a. Compute the payback period for the equipment : Payback penod 1-b. If the company requires a payback period of four years or less, would the equipment be purchased? O Yes O No 2-a Compute the simple rate of return on the equipment Use straight-line depreciation based on the equipment\'s useful lite Simple Rate of Return Simple rate of retum Type here to search

Solution

Basic data:

Cost of Equipment(Initial Investment) = $ 329,000

Annual Cost saving(Cash inflows per year) = $ 70,000

Life = 10 years

Payback period = Cost of Equipment/ Annual Cost saving

= $ 329,000/ $ 70,000

= 4.7 years

Payback Period

Choose Numerator

/

Choose Denominator

=

Payback period

$ 329,000

/

$ 70,000

=

4.7 years

The payback period of the equipment is 4.7 years. If the company requires a payback period of four years or less , the equipment would not be purchased as its payback period is more than four years, that is 4.7years.

Simple rate of return = (Cash inflows per year – Depreciation)/ Initial Investment

Depreciation =( Cost- Salvage value)/ Life

= ($329,000- 0)/ 10

= $32,900

Therefore, Simple rate of return = ($70,000- $32,900)/ $329,000

=$37,100/ $329,000

=11.276%

Simple Rate of Return

Choose Numerator

/

Choose Denominator

=

Simple Rate of Return

$37,100

/

$329,000

=

11.276%

Payback Period
Choose Numerator	/	Choose Denominator	=	Payback period
$ 329,000	/	$ 70,000	=	4.7 years