Problem:
Automation of the shipping department at Computer Mart would save labor costs. Details about the automation equipment are as follows:
Purchase price of automation equipment $1,200,000
Net annual cash savings provided by the
new equipment $200,000
Estimated service life of equipment 10 years
Required rate of return 12%
Q1. Compute the payback period for the automation equipment. If Computer mart requires a payback of five years or less, would you recommend purchase of the equipment? Explain your answer.
Q2. Compute the internal rate of return on the equipment. Use straight-line depreciation based on the equipment's estimated service life. Would you recommend that the equipment be purchased? Explain your answer.