Colchester 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

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 depreciation based on the equipments useful life, assuming $0 salvage value. Would the equipment be purchased if the companys required rate of return is 14%?