Sterling Cooper Advertising is considering purchasing some new data servers. The servers would cost $800,000 and have a useful life of eight years, with a salvage value of $125,000. Sterling Cooper estimates its annual revenues and expenses associated with the servers would be as follows:

Revenues		$500,000
Operating expenses:
Maintenance		$200,000
Insurance Depreciation		$75,000 $100,000
		($375,000)
Net operating income		$ 125,000

Required:

a) Assume that Sterling Cooper will not purchase new servers unless it provides a payback period of four years of less. Will the company purchase the servers? (2 marks)

b) Compute the simple rate of return promised by the server. If the company requires a simple rate of return of at least 20%, will the servers be purchased? (2 marks)

c) Are there any limitations to using the payback period and simple rate of return methods? List one limitations for each method. (2 marks)