Shields Company has gathered the following data on a proposed investment project

Question

Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes in this problem.)

1.0 years

0.2 years

4.1 years

6.1 years

(Ignore income taxes in this problem.) A company with $900,000 in operating assets is considering the purchase of a machine that costs $92,000 and which is expected to reduce operating costs by $24,000 each year. These reductions in cost occur evenly throughout the year. The payback period for this machine in years is closest to:

0.26 years

3.8 years

9.8 years

37.5 years

Shields Company has gathered the following data on a proposed investment project: (Ignore income taxes in this problem.)

Explanation / Answer

PAY BACK PERIOD

= 6YEARS + $8000 / $82000

= 6YEARS + 0.1

= 6.1 YEARS

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PAY BACK PERIOD

= 3 YEARS + $20000 / $24000

= 3YEARS + 0.8

= 3.8YEARS

YEAR CASH FLOW CUMULATIVE CASHFLOW 0 (500000) ($500000) 1 $82000 ($418000) 2 $82000 ($336000) 3 $82000 ($254000) 4 $82000 ($172000) 5 $82000 ($90000) 6 $82000 ($8000) 7 $82000 $74000 8 $82000 $156000 AND IT WILL GO ON TILL 16TH YEAR

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