Cash Payback Period, Net Present Value Analysis, and Qualitative Considerations

Question

Cash Payback Period, Net Present Value Analysis, and Qualitative Considerations

The plant manager of Shannon Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost $168,000. The manager believes that the new investment will result in direct labor savings of $56,000 per year for 10 years.

a. What is the payback period on this project?
____ years

b. What is the net present value, assuming a 12% rate of return? Use the table provided above. Round to the nearest whole dollar.

c. What else should the manager consider in the analysis?

Present Value of an Annuity of $1 at Compound Interest Year 6% 10% 12% 15% 20% 1 0.943 0.909 0.893 0.870 0.833 2 1.833 1.736 1.690 1.626 1.528 3 2.673 2.487 2.402 2.283 2.106 4 3.465 3.170 3.037 2.855 2.589 5 4.212 3.791 3.605 3.353 2.991 6 4.917 4.355 4.111 3.785 3.326 7 5.582 4.868 4.564 4.160 3.605 8 6.210 5.335 4.968 4.487 3.837 9 6.802 5.759 5.328 4.772 4.031 10 7.360 6.145 5.650 5.019 4.192

Explanation / Answer

A) Here in this problem annual earnings are equal for every year so

Pay back period = project cost / annual savings

=$168000/$56000 = 3 years

Intial investment recovered in 3 years

B) Npv = present value of cash in flow - Intial investment

= 5.650*$56000 - $168000

=$316,400 - $168,000 = $148,400

C) with this analysis manager can accept the project because according to pay back period the money recovered in only 3 years  

And according to NPV the project have higher positive Npv

Thank u

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