A piece of labour-saving equipment has just come onto the market, which 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 ¥):

Purchase cost of the equipment...............................................................¥216,000
Annual cost savings that will be provided by the equipment..................¥45,000
Life of the equipment..................................................................................12 years

Required:

1. Compute the payback period for the equipment. If the company requires a payback period of four years or less, 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. Will the equipment be purchased if the company requires a rate of return of at least 14%?