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

Question

2. Nova Products has a 4-year maximum acceptable payback period. The firm is considering the Payback comparisons purchase of a new machine and must choose between two alternatives. The first machine requires an initial investment of $13,000 and generates annual after-tax cash inflows of $3,000 for each of the next 11 years. The second machine requires an initial investment of $38,000 and provides an annual cash inflow after taxes of $9,000 for 26 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? years. (Round to two decimal places.) a. The payback period for the first machine is The payback period for the second machine is b. Is the first machine acceptable? (Select the best answer below.) years. (Round to two decimal places.) O Yes No Is the second machine acceptable? (Select the best answer below.) No O Yes c. Based on their payback periods, which machine should the firm accept? (Select the best answer below.) O A. Machine 2 OB. Machine! O C. Neither d. Do the machines in this problem illustrate any of the weaknesses of using payback? (Select the best answer below.) 0 A. Machine 2 has returns that last 26 years while Machine 1 has only 11 years of returns 0 B. Machine 2 has returns that last only 11 years while Machine 1 has 26 years of returns O C. Machine 2 has returns that last 26 years while Machine 1 has only 11 years of returns Payback considers only the first 11 years for each machine Payback cannot consider this difference; it ignores all cash inflows beyond the payback period Payback considers this difference; it includes all cash inflows beyond the payback period D. Machine 2 has returns that last 26 years while Machine 1 has only 11 years of returns Payback cannot consider this difference; it ignores all cash inflows beyond the payback period

Explanation / Answer

1st machine Payback=13000/3000=4.33
2nd machine Payback=38000/9000=4.22

If maximum payback accepted is 4, none of the machines should not be accepted

Machine 1 should not be accepted
Machine 2 should not be accepted
Neither should be accepted

Option D

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