Explain the purpose of a postaudit and comment on Ms. Halls investment record. D

Question

Explain the purpose of a postaudit and comment on Ms. Halls investment record. Determining the payback period The management team at Hoffman Manufacturing Company has decided to modernize the manufacturing facility. The company can replace an existing, outdated machine with one of two technologically advanced machines. One replacement machine would cost S60.0(X). Management estimates that it would reduce cash outflows for manufacturing expenses by $25,000 per year. This machine is expected to have an eight-year useful life and a SI.250 salvage value. The other replacement machine would cost $63,000 and would reduce annual cash outflows by an estimated $22,500. This machine has an expected 10-year useful life and a $6,250 salvage value. Determine the payback period for each investment alternative and identify which replacement machine Hodman should buy if it bases the decision on the payback approach. Discuss the shortcomings of the payback method of evaluating investment opportunities. Determining the payback period with uneven cashflows Walton Snowmobile Company is considering whether to invest in a particular new model. The model is top- of- the- line equipment for which Walton expects high the first year it is available for rent. However, as the snowmobile ages, it will and its rental revenues are expected to decline. The expected cash inflows an outflows follow.

Explanation / Answer

a. Payback period = Initial cash outlay / Annual cash inflows / savings

1st alternative :

Payback period = $ 60,000 / $ 25,000 = 2.4 years

2nd alternative:

Payback period = $ 63,000 / $ 22,500 = 2.8 years

The 1st alternative would be preferred as the payback period is shorter.

b. Shortcomings of the payback period are as follows:

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