EXERCISE 12-10 Basic Payback Period and Simple Rate of Return Computations (LO3,

Question

EXERCISE 12-10 Basic Payback Period and Simple Rate of Return Computations (LO3, LO4) Martin Landscaping Company is considering the purchase of a new piece of equipment for laying sprinkler systems. Relevant information concerning the equipment follows: Purchase cost . Annual cost savings that will be ...$180,000 provided by the equipment. .$37,500 12 years Required: 1. Compute the payback period for the equipment.If the company rejects all proposals with a payback 4 Compute the simple rate of on period of more than four years, would the equipment be purchased? turn on the equipment. Use straight-line depreciation based on the equipment's useful life. Would the equipment be purchased if the company requires a rate of return of at least 14%?

Explanation / Answer

a) Payback period = 180000/37500 = 4.8 years

Equipment will not be purchased

b) Straight line dep = 180000/12 = 15000 per year

Net income (saving) = 37500-15000 = 22500

Simple rate of return = 22500*100/180000 = 12.5%

Equipment will not be purchased

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