Answered: Purchase cost of the equipment Annual…

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

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter12: Capital Investment Analysis

Section: Chapter Questions

Problem 7E

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Concept explainers

Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

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

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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