ADMS 2510 Lecture : Week11 Tutorial Question Solution.docx
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A piece of laborsaving equipment has just come onto the marketthat Mitsui Electronics, Ltd., could use to reduce costs in one ofits plants in Japan. Relevant data relating to the equipmentfollow: |
Purchase cost of theequipment | $ | 724,500 | |
Annual cost savingsthat will be provided by the equipment | $ | 115,000 | |
Life of theequipment | 12 years | ||
Required: |
1-a. | Compute the paybackperiod for the equipment. |
Payback Period Choose Numerator: Choose Denominator: / =Payback Period Investment required/Annual net cash inflow =Payback period $ ----/$____ = years |
1-b. | If the company requires a payback period of four years or less,would the equipment be purchased? | ||||
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2-a. | Compute the simple rate of return on the equipment. Usestraight-line depreciation based on the equipmentâs usefullife. | |||||||||||||||||||||||||||
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2-b. | Would the equipmentbe purchased if the companyâs required rate of return is 15%? | ||||
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Adria Lopez is considering the purchase of equipment for Success Systems that would allow the company to add a new product to its coputer furniture line. The equipment is expected to cost $300,000 and to have a six-year life and no salvage value. It will be depreciated on a striaght-line basis. Success Systems expects to sell 100 unit of the equipment's product each year. The expected annual income related to this equipment follows.
Sales ...................................................................................$375,000
Costs
Materials, labor, and overhead (except depreciation) ........200,000
Depreciation on new equipment............................................ 50,000
Selling and administrative expenses .....................................37,500
Total costs and expenses ...........................................................287,500
Pretax income ...............................................................................87,500
Income taxes (30%)...................................................................... 26,250
Net income................................................................................... $61,250
Required: compute the (1) payback period and (2) accounting rate of return for this equipment. Record answers as percents, rounded to one decimal.
Please help me figure out the TABLES
Cash Flow Analysis for Proposed Equipment Investment
Business Solutions' | ||||
Cash Flow Analysis - Equipment Investment | ||||
Expected Accrual Figures | Expected Net Cash Flows | |||
Annual Sales | ||||
Costs | ||||
Materials, labor and overhead (no depreciation) | ||||
Depreciation of new equipment | ||||
Selling and Administrative Expenses | ||||
Pretax Income | ||||
Income tax | ||||
Net Income | ||||
Annual Net Cash Flows | ||||
7.1
As computed in table 14 with the data from the cash flow analysis in table 13: the payback period (PBP) for this equipment investment would be _____years.
The accounting rate of return (ARR) on this equipment investment would be _____%.
Payback Period and Accounting Rate of Return Calculations
PBP= | |||||
ARR= | |||||
A piece of labor-saving 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:
Purchase cost of the equipment | $ | 768,000 |
Annual cost savings that will be provided by the equipment | $ | 120,000 |
Life of the equipment | 10 years | |
Required:
1a. Compute the payback period for the equipment.
1b. If the company requires a payback period of four years or less, would the equipment be purchased?
2a. Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipmentâs useful life.
2b. Would the equipment be purchased if the companyâs required rate of return is 16%?