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 Taiwan Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost $1,400,000. The manager believes that the new investment will result in direct labor savings of $350,000 per year for 10 years. a. What is the payback period on this project? b. 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 $ c. What else should the manager consider in the analysis?

Explanation / Answer

a. Payback period:

Cost of equipment - 1,400,000

labour Saving - 350,000

Payback period - 1400000/350000 = 4 years

b.

750598

c.If there is any other equipment which can be supplemented then that equipment should alsobe considered before purchasing.

Net Present value: Years Cash Inflow/outflow 10% PV 0 -1400000 1.000 -1400000 1 350000 0.909 318182 2 350000 0.826 289256 3 350000 0.751 262960 4 350000 0.683 239055 5 350000 0.621 217322 6 350000 0.564 197566 7 350000 0.513 179605 8 350000 0.467 163278 9 350000 0.424 148434 10 350000 0.386 134940 NPV

750598

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