Martin Company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment follows: (Ignore income taxes.) Purchase cost $ 195,000 Annual cost savings that will be provided by the equipment $ 38,600 Life of the equipment 13 years Required: 1a. Compute the payback period for the equipment. (Round your answer to 1 decimal place.) Payback period years 1b. If the company requires a payback period of 4 years or less, would the equipment be purchased? No 2a. Use straight-line depreciation based on the equipment's useful life. Compute the simple rate of return on the equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.) Simple rate of return % 2b. Would the equipment be purchased if the company's required rate of return is 11%? Yes Explanation: 1a. The payback period is: Payback period = Investment required Net annual cash inflow = $195,000 = 5.1 years $38,600 per year 1b. No, the equipment would not be purchased because the (5.1 years) payback period exceeds the company's maximum (4-years) payback period . 2a. The simple rate of return would be computed as follows: Annual cost savings $ 38,600 Less annual depreciation ($195,000 ÷ 13 years) 15,000 Annual incremental net operating income $ 23,600 Simple rate of return = Annual incremental net operating income Initial investment = $23,600 = 12.1% $195,000 b. The equipment would be purchased since its 12.1% rate of return is greater than the company's 11% required rate of return.

Martin Company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment follows: (Ignore income taxes.)

Purchase cost	$	195,000
Annual cost savings that will be     provided by the equipment	$	38,600
Life of the equipment		13 years

   

Required:

1a.	Compute the payback period for the equipment. (Round your answer to 1 decimal place.)

Payback period

years

  

1b.	If the company requires a payback period of 4 years or less, would the equipment be purchased?
	No

2a.	Use straight-line depreciation based on the equipment's useful life. Compute the simple rate of return on the equipment. (Round your answer to 1 decimal place. Omit the "%" sign in your response.)

Simple rate of return

%

2b.	Would the equipment be purchased if the company's required rate of return is 11%?
	Yes

Explanation:

1a.

The payback period is:

Payback period	=	Investment required
		Net annual cash inflow
	=	$195,000	= 5.1 years
		$38,600 per year

1b.

No, the equipment would not be purchased because the (5.1 years) payback period exceeds the company's maximum (4-years) payback period .

2a.

The simple rate of return would be computed as follows:

   

Annual cost savings	$	38,600
Less annual depreciation ($195,000 ÷ 13 years)		15,000
Annual incremental net operating income	$	23,600

Simple rate of return	=	Annual incremental net operating income
		Initial investment
	=	$23,600	= 12.1%
		$195,000

b.

The equipment would be purchased since its 12.1% rate of return is greater than the company's 11% required rate of return.