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Payback, Internal Rate of Return and Purchase Price

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Automation of the shipping department at Computer Mart would save labor costs. Details about the automation equipment are as follows:

Purchase price of automation equipment $1,200,000
Net annual cash savings provided by the
new equipment $200,000
Estimated service life of equipment 10 years
Required rate of return 12%

A. Compute the payback period for the automation equipment. If Computer mart requires a payback of five years or less, would you recommend purchase of the equipment? Explain your answer.

B. Compute the internal rate of return on the equipment. Use straight-line depreciation based on the equipment's estimated service life. Would you recommend that the equipment be purchased? Explain your answer.

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Solution Summary

This solution examines the payback period, internal rate of return and the purchase price of a piece of automation equipment. It includes the answers in Excel format for the student's convenience

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