Blanda Incorporated management is considering investing in two alternative produ
ID: 2646165 • Letter: B
Question
Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 9 percent discount rate for their production systems.
What are the payback periods for production systems 1 and 2? (Round answers to 2 decimal places, e.g. 15.25.)
If the systems are mutually exclusive and the firm always chooses projects with the lowest payback period, in which system should the firm invest?
system 1 or system 2?
Year System 1 System 2 0 -$13,300 -$43,200 1 13,300 31,600 2 13,300 31,600 3 13,300 31,600Explanation / Answer
Payback Period is Number of years a firm takes to recover its original Investment Year System 1 cumulative CF 1 System 2 cumulative CF 2 0.00 -13300 -13300 -43200 -43200 1 13300 0 31600 -11600 2 13300 13300 31600 20000 3 13300 26600 31600 51600 Payback Period 2Years 2 + 31500/51600 2.61 Years If systems are mutually exclusive, firm will choose System 1 Due to less payback period
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