9- 10.6 Blanda Incorporated management is considering investing in two alternati

Question

9- 10.6

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 10 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?

Explanation / Answer

Answer:

Payback Period:

System 1 =1 year

System 2= 1 year+10900/32300

=1.34 year

The Firm should invest in System 1.

Year System 1 Cumulative System 1 System 2 Cumulative System 2 0 -14700 -14700 -43200 -43200 1 14700 0 32300 -10900 2 14700 14700 32300 21400 3 14700 29400 32300 53700

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