Nova Products has a 4-year maximum acceptable payback period. The firm is consid

Question

Nova Products has a 4-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternatives. The first machine requires an initial investment of $15,000 and generates annual after-tax cash flows of $3,000 for each of the next 12 years. The second machine requires an initial investment of $29,000 and provides an annual cash inflow after taxes of $7,000 for 30 years.
A. Determine the payback period for each Machine.
B. Comment on the acceptability of the machines, assuming that they are independent projects.
C. Which machine should the firm accept? Why?
D. Do the machines in this problem illustrate any of the weaknesses of using payback? Nova Products has a 4-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternatives. The first machine requires an initial investment of $15,000 and generates annual after-tax cash flows of $3,000 for each of the next 12 years. The second machine requires an initial investment of $29,000 and provides an annual cash inflow after taxes of $7,000 for 30 years.
A. Determine the payback period for each Machine.
B. Comment on the acceptability of the machines, assuming that they are independent projects.
C. Which machine should the firm accept? Why?
D. Do the machines in this problem illustrate any of the weaknesses of using payback?
A. Determine the payback period for each Machine.
B. Comment on the acceptability of the machines, assuming that they are independent projects.
C. Which machine should the firm accept? Why?
D. Do the machines in this problem illustrate any of the weaknesses of using payback?

Explanation / Answer

Ans A First Machine Second Machine Initial Investment         15,000.00               29,000.00 Annual Net cash flows           3,000.00                  7,000.00 Pay Back Period=Initial Investment/Annual Net cash flow                    5.00                          4.14 Ans B Minimum Pay Back                    4.00                          4.00 Actual pay Back                    5.00                          4.14 Decision No No Ans C Second Machine , Since the same has a lesser pay back period. Ans D They do not consider the cash inflows after the pay back period

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