Exercise 11-10 Basic Payback Period and Simple Rate of Return Computations [LO11

Question

Exercise 11-10 Basic Payback Period and Simple Rate of Return Computations [LO11-1, LO11-4]

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:

If the company requires a payback period of four years or less, would the equipment be purchased?

Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment’s useful life.

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:

Explanation / Answer

Ans: payback period=448000/80000=5.6 years

Ans 1b As payback period is 5.6 years,equient shouldn't be purchased.

Ans 2depreciation on asset=448000/10 years =44800

Net profit=80000-44800=35200

Simple rate of return=35200/448000%=7.86%

Ans 2b No, as actual return is less than required return.

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