purchase machine for $30,000. Will cost additional 2,500 to havenew machine inst
ID: 1237014 • Letter: P
Question
purchase machine for $30,000. Will cost additional 2,500 to havenew machine installed. Expect to save 12,000 in annual operatingand maintenance costs. The machine will last 5 years, with expectedsalvage value of 5,000.A) How long will it take to recover investment(plus installationcost)?
B) If interest rate is known to be 14%, determine the discountedpayback period.
Need help on A. Will B look like this?
EOY cash flow cost offunds cum. cash flow
0 32,000 - -32,000
1 12,000 4,480 -24,480
2 12,000 3,427 -15,907
3 12,000
4 12,000
5 12,000 andso on
?
Explanation / Answer
Year
Annual Cash Flows
Net Cash flows
$12,000 + $5,000
Year
Annual Cashflows
Present Value Factors at 14%
Present Values
Cumulative
(A) CalculatingPayback Period:Year
Annual Cash Flows
Net Cash flows
0 ($32,500) ($32,500) 1 $12,000 ($20,500) 2 $12,000 ($8,500) 3 $12,000 4 $12,000 5$12,000 + $5,000
Payback Period = {Last yearwith a negative NCF} + {Absolute value of NCF in that year / TotalCash flow in the following year} Payback Period =2 + [$8,500 /$12,000] Payback Period = 2 + 0.708 Payback Period = 2.71years (B) Calculating DiscountedPayback Period, if interest rate is 14%:Year
Annual Cashflows
Present Value Factors at 14%
Present Values
Cumulative
1 $12,000 0.8772 $10,526.40 ($21,973.60) 2 $12,000 0.7695 $9,234.00 ($12,739.60) 3 $12,000 0.6750 $8,100.00 ($4,639.60) 4 $12,000 0.5921 $7,105.20 5 $12,000 0.5194 $6,232.80 Discounted Payback Period = 3 +($4,639.60 / $7,105.20) Discounted Payback Period = 3 +0.652986 Discounted Payback Period =3.65 yearsRelated Questions
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