Question - Big Cat 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
(Ignore income taxes.)
Compute the payback period for the equipment. If the company rejects all proposals with a payback period of more than four years, would the equipment be purchased?
Compute the simple rate of return on the equipment. Use straight-line depreciation based on the equipment's useful life, assuming $0 salvage value. Would the equipment be purchased if the company's required rate of return is 14%?