Lila Limited is considering the purchase of a new machine for its manufacturing

Question

Lila Limited is considering the purchase of a new machine for its manufacturing facilities. The purchase of the machine is expected to reduce operating costs.

Presented below is the relevant cost and operating information relating to the new machine:

Initial Cost

$240262

Installation Costs

$22052

Useful Life

11 years

Expected annual cash operating savings – years 1-11

$56092

Additional annual cash fixed costs

$12802

Assuming Lila Limited uses the payback method to evaluate capital expenditures, what is the payback period for this expenditure?

Select one:

a. 4.68 years

b. 6.06 years

c. 3.89 years

d. 5.55 years

Plato Ltd. is considering one of two different projects. Cash flow data for these projects are as follows:

Year

Project CR

Project DR

0

($60187)

($92988)

1

21594

16764

2

31834

40283

3

4864

46958

4

9932

11000

Assuming the company’s objective is to minimize the payback period, what is the payback period of the project that should be accepted?

Select one:

a. 2.19 years

b. 3.77 years

c. 3.19 years

d. 2.77 years

Initial Cost

$240262

Installation Costs

$22052

Useful Life

11 years

Expected annual cash operating savings – years 1-11

$56092

Additional annual cash fixed costs

$12802

Explanation / Answer

1 Payback period for this expenditure=(240262+22052)/(56092-12802)= 6.06 years 2 Year Project CR Cumulative cash flows Project DR Cumulative cash flows 0 -60187 -60187 -92988 -92988 1 21594 -38593 16764 -76224 2 31834 -6759 40283 -35941 3 4864 -1895 46958 11017 4 9932 8037 11000 22017 Payback period Profject CR=3+(1895/9932)= 3.19 years Payback period Profject DR=2+(35941/46958)= 2.77 years Option D is correct

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