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Basic Payback Period and Simple Rate of Return for equipment

Basic Payback Period and Simple Rate of Return Computations

A piece of equipment has just come into the market. The company could se to reduce costs in one of it's plants in Japan. Relevant data relating to the equipment is below in relevant currency, the yen(V).

Purchase Cost of the equipment V432000
Annual cost savings that will be provided by the equipment V90000
Life of the equipment 12 years

Ignore income taxes:

1) Compute the paycheck period for the equipment. If the company requires a payback period of 4 years or less would the equipment be purchased?

2) Compute the simple rate of return on the equipment. Use straight line depreciation based on the equipments usefull life. Would the equipment be purchased if the companies required rate ot return is 14%

Solution Preview

See attached Excel file for better formatting and to see formulas.

investment (432,000.00) Cumulative return
savings year 1 90,000.00 90,000.00
savings year 2 90,000.00 180,000.00
savings year 3 90,000.00 270,000.00
savings year 4 90,000.00 360,000.00
savings year 5 90,000.00 450,000.00 <--- payback period = Year 5
savings year 6 90,000.00 540,000.00
savings year 7 90,000.00 630,000.00 ...

Solution Summary

Diagram to shown you this included with computations.