Question

A new piece of laboratory equipment costing $10,000 promises to save $4000 per year in materials and overtime pay. If the cost of money is 12% and projects must have a 3-year discounted payback period, should the equipment be purchased?

Answer 1

YES, the equipment should be purchased

Explanation:

You borrow $10000 for the piece of laboratory and the cost of money is 12%. After 3 years you will need to pay the $10000 you borrowed and the extra amount caused by the interest. 12% of $10000 if $1200, so you will end up having to pay $10000+$1200 = $11200. In three years your equipment saves you $4000*3 = $12000, which is bigger than the amount you have to pay. So, in the end the equipment should be purchased because it gives you a gain of $800.