Question 2

Prince Philip Hospital is about to purchase new laundry equipment which will make savings on external laundry costs, but will incur additional running expenses, as follows:

• The running costs include both fixed and variable costs but do NOT include any depreciation for which the hospital uses the straight-line method

• The new laundry equipment will cost £105,000 and will be disposed of at the end of Year 8 for £5,000 (scrap value)

Required:

(a) Calculate the payback period for the laundry equipment

(b) Calculate the Accounting Rate of Return for the laundry equipment (on an initial investment basis)

(c) Explain the advantages of using the payback period over the ARR

(d) What are the disadvantages of both techniques?