Martin Company is considering the purchase of a new piece of equipment. Relavant 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

Required
(ignore income taxes)
1. 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?

2. Compute the simple rate of return on the equipment. Use straight line deprerciation based on the equipment's useful life. Would the equipment be purchased if the company requires a rate of return of at least 14%.

1. No. Payback period = 4.8 years
2. No. Rate of Return = 13%