A piece of laborsaving 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 (currency is in thousands of yen, denoted by 7 ) :
Required:
(Ignore income taxes.)
(b) Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment's useful life. Would the equipment be purchased if the company's required rate of return is 14% ?

The term "payback time" refers to the amount of years needed to recoup the initial monetary outlay. It is, in other words, the length of time that a machine, facility, or other investment has generated enough net income to pay its investment costs. In capital planning, the term "payback period" describes the amount of time needed to recover investment costs or to break even.

Annual cost saving 85,000

Less: Depreciation 40,375

Annual profit 44,625

Simple rate of return = Annual profit / Initial outlay x 10

=$44,625/$484,500 x 100

= 9.21%

Depreciation = Cost - Residual value/estimated useful life

= $484,500 - 0/12 years

= $40,375 per annum

To learn more about payback period refer to:

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