Camptown Togs, Inc., a children\'s clothing manufacturer, has always found payro

Question

Camptown Togs, Inc., a children's clothing manufacturer, has always found payroll processing to be costly because it must be done by a clerk. The number ofpiece-goods coupons received by each employee is collected and the types of tasks performed by each employee are calculated. Not long ago, an industrial engineer designed a system that partially automates the process by means of a scanner that reads the piece-goods coupons. Management is enthusiastic about this system, because it utilizes some personal computer systems that were purchased recently. It is expected that this new automated system will save

$49000

per year in labor. The new system will cost about

$30000

to build and test prior to operation. It is expected that operating costs, including income taxes, will be about

$6000

per year. The system will have a five-year useful life. The expected net salvage value of the system is estimated to be

$4000.

Assume that the cash flows occur continuously throughout the year.

(a) How long does it take to recover the investment?

Explanation / Answer

Net annual benefit (NAB) ($) = Annual savings - Annual cost = 49,000 - 6,000 = 43,000

NAB, year 0 = - $30,000

NAB, year 5 ($) = 43,000 + 4,000 (Salvage value) = 47,000

Investment recovery is measured by Payback period (PBP) which is the time by when cumulative NAB is zero.

PBP lies between years 0 and 1.

PBP = 0 + (Absolute value of cumulative NAB, year 0 / NAB, year 1) = $30,000 / $43,000 = 0.70 years

Year NAB ($) Cumulative NAB ($) 0 -30,000 -30,000 1 43,000 13,000 2 43,000 56,000 3 43,000 99,000 4 43,000 1,42,000 5 47,000 1,89,000

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