Heartland Paper Company is considering the purchase of a new high-speed cutting

Question

Heartland Paper Company is considering the purchase of a new high-speed cutting machine. Two cutting machine manufacturers have approached Heartland with proposals:

(1) Toledo Tools and

(2) Akron Industries.

Regardless of which vendor Heartland chooses, the following incremental cash flows are expected to be realized.

Year Incremental

Cash Inflows Incremental Cash Outflows

Year

1 $ 27,000 $ 22,000

2 28,000 23,000

3 33,000 28,000

4 36,000 31,000

5 35,000 30,000

6 34,000 29,000

a. If the machine manufactured by Toledo Tools costs $30,000, what is its expected payback period?

b. If the machine manufactured by Akron Industries has a payback period of 60 months, what is its cost?

c. Which of the machines is most attractive based on its respective payback period?

Explanation / Answer

Annual net cash flows = $5000 a Payback period = 30000/5000 = 6 years b Cost = 5000*(60/12) = $25000 c Machine manufactured by Akron Industries is most attractive based on its respective payback period

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