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# hw14 - A piece of laborsaving equipment has just come onto...

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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 (currency is in thousands of yen, denoted by ¥): (Ignore income taxes.) Purchase cost of the equipment ¥432,000 Annual cost savings that will be provided by the equipment ¥90,000 Life of the equipment 12 years Requirement 1: (a) Compute the payback period for the equipment. (Round your answer to 1 decimal place.) Payback period years (b) If the company requires a payback period of four years or less, would the equipment be purchased? No Requirement 2: Use straight-line depreciation based on the equipment's useful life. (a) 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 % (b) Would the equipment be purchased if the company's required rate of return is 14%?

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No Explanation: 1: (a) The payback period is: Pay back period = Investment required Annual net cash inflow = ¥432,000 = 4.8 years ¥90,000 (b) No, the equipment would not be purchased because the payback period (4.8 years) exceeds the company's maximum payback time (4.0 years). 2: (a) The simple rate of return would be computed as follows: Annual cost savings ¥90,000 Less annual depreciation (¥432,000 ÷ 12 years) 36,000 Annual incremental net operating income ¥54,000 Simple rate of return = Annual incremental net operating income Initial investment = ¥54,000 =12.5% ¥432,000 (b) No, the equipment would not be purchased because its 12.5% rate of return is less than the company's 14% required rate of return. 2. Labeau Products, Ltd., of Perth, Australia, has \$35,000 to invest. The company is trying to decide
between two alternative uses for the funds as follows: (Ignore income taxes.) Invest in Project X Invest in Project Y Investment required \$35,000 \$35,000 Annual cash inflows \$9,000 Single cash inflow at the end of 10 years \$150,000 Life of the project 10 years 10 years The company's discount rate is 18%. To determine the appropriate discount factor(s) using tables, click here to view Exhibit 14B-1 and Exhibit 14B- 2 . Alternatively, if you calculate the discount factor(s) using a formula, round to three (3) decimal places before using the factor in the problem. Required: (a) Determine the net present value. (Round your answer to the nearest dollar amount. Negative amount should be indicated by a minus sign. Omit the "\$" sign in your response.) Net Present Value Project X \$ Project Y \$ (b) Which investment would you recommend that the company accept? Project X Explanation: (a) Item Year(s) Amount of Cash Flows 18% Factor Present Value of Cash Flows Project X: Investment Now \$(35,000) 1.000 \$(35,000) Annual cash inflow 1-10 \$9,000 4.494 40,446 Net present value \$5,446 Project Y: Initial investment Now \$(35,000) 1.000 \$(35,000) Single Cash inflow 10 \$150,000 0.191 28,650 Net present value \$(6,350)

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(b) Project X should be selected. Project Y does not provide the required 18% return, as shown by its negative net present value.
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hw14 - A piece of laborsaving equipment has just come onto...

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