Question - Martin Company is considering the purchase of a new piece of equipment. Relevant information concerning the equipment follows: (Ignore income taxes.)
Purchase $ 180,000
Annual cost savings that will be provided by the equipment $ 37,500
Life of the equipment 12 years
Required:
1a. Compute the payback period for the equipment.
1b. If the company requires a payback period of four years or less, would the equipment be purchased?
2a. Use straight-line depreciation based on the equipment's useful life. Compute the simple rate of return on the equipment.
2b. Would the equipment be purchased if the company's required rate of return is 14%?