A piece of laborsaving equipment has just come onto the marketthat Mitsui Electronics, Ltd.,...

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Accounting

A piece of laborsaving equipment has just come onto the marketthat Mitsui Electronics, Ltd., could use to reduce costs in one ofits plants in Japan. Relevant data relating to the equipmentfollow:

  Purchase cost of the equipment $ 530,000
  Annual cost savings that will be
    provided by the equipment $ 100,000
  Life of the equipment 10 years

Required:
1-a. Compute the payback period for the equipment.
Payback Period
Choose Numerator: / Choose Denominator: = Payback Period
Annual net cash outflow / Investment required = Payback period
$30,000 / $50,000 = 0.6 years
1-b.
If the company requires a payback period of four years or less,would the equipment be purchased?
Yes
No
Simple Rate of Return
Choose Numerator: / Choose Denominator: = Simple Rate of Return
Annual incremental net operatingincome / Initial investment = Simple rate of return
$320,000 / $56,000 = 571.4 %
2-b. Would the equipment be purchased if the company’s required rateof return is 15%?
Yes
No

Answer & Explanation Solved by verified expert

4.3 Ratings (932 Votes)

Answer to 1-a :

Payback Period
Choose Numerator	/	Choose Denominator	=	Payback Period
Investment Required	/	Annual Cost Savings	=	Payback Period
*5,30,000*	/	*1,00,000*	=	*5.30*

Answer to 1-b :

*No, the equipment will not be purchased if the company requires a payback of four years or less as the payback period as computed above in 1-a is 5.3 years.*

					Answer to 2-a :

Simple Rate of Return
Choose Numerator	/	Choose Denominator	=	Simple Rate of return
Annual incremental net operating income	/	Initital Investment	=	Simple Rate of return
*1,00,000*	/	*5,30,000*	=	*19%*

Answer to 2-b :

*Yes the equipment will be purchased if the company's required rate of return is 15% since the rate of return earned from purchase of equipment is 19% as computed above in 2-a above.*

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Transcribed Image Text

In: AccountingA piece of laborsaving equipment has just come onto the marketthat Mitsui Electronics, Ltd., could...A piece of laborsaving equipment has just come onto the marketthat Mitsui Electronics, Ltd., could use to reduce costs in one ofits plants in Japan. Relevant data relating to the equipmentfollow: Purchase cost of the equipment$530,000 Annual cost savings that will be provided by the equipment$100,000 Life of the equipment10 years Required:1-a.Compute the payback period for the equipment.Payback PeriodChoose Numerator:/Choose Denominator:=Payback PeriodAnnual net cash outflow/Investment required=Payback period$30,000/$50,000=0.6years1-b.If the company requires a payback period of four years or less,would the equipment be purchased?YesNoSimple Rate of ReturnChoose Numerator:/Choose Denominator:=Simple Rate of ReturnAnnual incremental net operatingincome/Initial investment=Simple rate of return$320,000/$56,000=571.4%2-b.Would the equipment be purchased if the company’s required rateof return is 15%?YesNo


Purchase cost of the equipment	$	530,000
Annual cost savings that will be provided by the equipment	$	100,000
Life of the equipment		10 years