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 $320,000. The manager believes that the new investment will result in direct labor savings of $64,000 per year for 10 years. Present Value of an Annuity of $1 at Compound Interest What is the payback period on this project? years What is the net present value, assuming a 10% rate of return? Use the table provided above. Round to the nearest whole dollar. Net present value $ What else should the manager consider in the analysis?

Explanation / Answer

1) Pay back period=5Years

Accumulated cash flows at end of 5th year is nil sopayback period is 5years

2)NPV

=-$320,000+$64,000*PVAF for 10 Years @10%

=-$320,000+$64,000*6.145=$73,280

3) The NPV of the project at 10% rate of return is positive so the manager can accpt the project

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