Question 1 Bailey, Inc., is considering buying a new gang punch that would allow

Question

Question 1 Bailey, Inc., is considering buying a new gang punch that would allow them to produce circuit boards more efficiently. The punch has a first cost of $100,000 and a useful life of 15 years. At the end of its useful life, the punch has no salvage value. Labor costs would increase $2,000 per year using the gang punch, but raw material costs would decrease $12,000 per year. MARR is 5 %/year. Click here to access the TVM Factor Table Calculator What is the discounted payback period for this investment? years Carry all interim calculations to 5 decimal places and then round your final answer to the nearest year. The tolerance is ±1 If the maximum attractive DPBP is 3 years, what is the decision rule for judging the worth of this investment? Should Bailey buy the gang punch based on DPBP?

Explanation / Answer

(a) Annual net benefit (NAB) ($) = Decrease in material cost - Increase in Labor cost = 12,000 - 2,000 = 10,000

(NAB in year 0 = - $100,000)

Discounted Payback Period (DPBP) is the time by when cumulative discounted NAB is zero.

DPBP lies between years 14 & 15.

DPBP = 14 + (Absolute value of cumulative discounted NAB, year 14 / Discounted NAB, year 15)

= 14 + (1,014 / 4,810) = 14 + 0.21 = 14.21

= 14 years

(b)

Decision rule is:

Accept project if DPBP is less than or equal to 3 years.

Reject project if DPBP is higher than 3 years.

(c)

Bailey should not buy since DPBP is more than 3 years.

Year NAB ($) PV Factor @5% Discounted NAB ($) Cumulative Discounted NAB ($) (A) (B) (A) x (B) 0 -1,00,000 1.0000 -1,00,000 -1,00,000 1 10,000 0.9524 9,524 -90,476 2 10,000 0.9070 9,070 -81,406 3 10,000 0.8638 8,638 -72,768 4 10,000 0.8227 8,227 -64,540 5 10,000 0.7835 7,835 -56,705 6 10,000 0.7462 7,462 -49,243 7 10,000 0.7107 7,107 -42,136 8 10,000 0.6768 6,768 -35,368 9 10,000 0.6446 6,446 -28,922 10 10,000 0.6139 6,139 -22,783 11 10,000 0.5847 5,847 -16,936 12 10,000 0.5568 5,568 -11,367 13 10,000 0.5303 5,303 -6,064 14 10,000 0.5051 5,051 -1,014 15 10,000 0.4810 4,810 3,797

Related Questions

Navigate

• Browse (All)
• Browse Q
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.