Answered: Purchase cost of the equipment Annual…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Payback Period and Simple Rate of Return Computations

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:

Required:

1. What is the payback period for the equipment? If the company requires a payback period of four years or less, would the equipment be purchased?

2. What is the simple rate of return on the equipment? Use straight-line depredation based on the equipment’s useful life. Would the equipment be purchased if the company’s required rate of return is 14%?

Purchase cost of the equipment
Annual cost savings that wili be
provided by the equipment
Life of the equipment......
$432,000
.....
$90,000
...
12 years

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