The plant manager of Shannon Electronics Company is considering the purchase of

Question

The plant manager of Shannon Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost $345,000. The manager believes that the new investment will result in direct labor savings of $69,000 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.

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

Answer:a Calculation of the payback period on this project:

Payback period=5 years

Answer:b Calculation of NPV:

Particulars Time Cash flow Cumulative cash flows New equipment cost 0 -345000 -345000 Direct labor savings 1 69000 -276000 2 69000 -207000 3 69000 -138000 4 69000 -69000 5 69000 0 6 69000 69000 7 69000 138000 8 69000 207000 9 69000 276000 10 69000 345000

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