The Dohickie Company is considering an investment in equipment. The following in

Question

The Dohickie Company is considering an investment in equipment. The following information is available: Cost $300,000 ($200,000 down, $50,000 end of first year and starting at the end of the fourth year, $10,000 per year until completely paid) Economic Life-10 years Annual Profit from Investment Years 1-5 $50,000/per year Years 6-10 $30,000/per year Salvage Value $1,000 Repair Required at End of Year 8-$2,000 No Need for Old Machine if Purchasing New One. Cost $300,000 Accum. Depreciation $280,000 Sales Price $25,000 Gain on Sale $5,000 Required Rate of Return 8% REQUIRED: Using Net Present Value Method, show calculations to determine if investment should be made. What is the Payback Period?

Explanation / Answer

NPV Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Cost       (200,000)    (50,000)    (10,000)    (10,000) (10,000) (10,000) (10,000) Annual Profit from investment      50,000      50,000    50,000      50,000      50,000      30,000    30,000     30,000    30,000       30,000 Repair cost     (2,000) Salvage           1,000 Sale proceeds old m/c          25,000 Net Cash flow     (175,000)                -        50,000    50,000      40,000      40,000      20,000    20,000     18,000    30,000       31,000 PV factor @8%                     1         0.926         0.857       0.794         0.735         0.681        0.630      0.583       0.540      0.500         0.463 PV of cash flows     (175,000)                -        42,867    39,692      29,401      27,223      12,603    11,670       9,725    15,007       14,359 NPV =          27,548 Payback period in years=               4.88 As the NPV is positive, the investment can be made.

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