Martin Company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment

Question:

Martin Company is considering the purchase of 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 for the equipment. If the company rejects all proposals with a of more than four years, would 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. Would the equipment be purchased if the company’s required rate of return is 14%?

Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...