Engineering Economics Pizza-in-a-Hurry operates a pizza delivery, they use, two

Question

Engineering Economics

Pizza-in-a-Hurry operates a pizza delivery, they use, two eight year-old vehicles for delivery, both of which are large, consume a great deal of gas and are starting to cost a lot to repair. The owner, Ray, is thinking of replacing one of the cars with a smaller, three-year-old car that his sister-in-law is selling for $8000. Ray figures he can save $3000, $2000, and $1500 per year for the next three years and $1000 per year for the following two years by purchasing the smaller car. What is the payback period for this decision?

Explanation / Answer

Payback Period = A +(B/C)

In the above formula,
A is the last period with a negative cumulative cash flow;
B is the absolute value of cumulative cash flow at the end of the period A;
C is the total cash flow during the period after A

Payback Period = 4 + (|-$500| / $1000)
                        = 4 + ($500 / $1000)
                        = 4 + 0.5
                        = 4.5 years

Year Net cash flow($) cumulative net cash flow($) 0 -8000 -8000 1 3000 -5000 2 2000 -3000 3 1500 -1500 4 1000 -500 5 1000 500

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