Question

Colchester Company is considering purchasing a new piece of equipment. Relevant information concerning the equipment follows:
Purchase cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180,000
Annual cost savings that will be
Provided by the equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,500
Life of the equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 years
Required:
Ignore income taxes.
1. Compute the payback period for the equipment. If the company rejects all proposals with a payback period of more than four years, will the equipment be purchased?
2. Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment’s useful life, assuming $0 salvage value. Will the equipment be purchased if the company’s required rate of return is 14%?


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  • CreatedJuly 08, 2015
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