Camptown Togs. Inc., a children\'s clothing manufacturer, has always found payro

Question

Camptown Togs. Inc., a children's clothing manufacturer, has always found payroll processing to be costly because it must be done by a clerk. The number of piece-goods coupons received by each employee is collected and the types of tasks performed by each employee are calculated. Not long ago. an industrial engineer designed a system that partially automates the process by means of a scanner that reads the piece-goods coupons. Management is enthusiastic about this system, because it utilizes some personal computer systems that were purchased recently. It is expected that this new automated system will save $45, 000 per year in labor. The new system will cost about $30, 000 to build and test prior to operation. It is expected that operating costs, including income taxes, will be about $5, 000 per year. The system will have a five-year useful life. The expected net salvage value of the system is estimated to be $3, 000. Assume that the cash flows occur continuously throughout the year. (a) How long does it take to recover the investment? The payback period is_years. (Round to two decimal places.) (b) If the firm's interest rate is 15% after taxes, what would be the discounted payback period for this project? The discounted payback period would be years.

Explanation / Answer

This question should go to management accounting however I know this one so I will answer as goodwill gesture.

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Initial investment = 30000 + 5000

Saving per year = 45000

Payback period = 0.74 years

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Interest rate = 15%

Initial investment = 35000

Saving per year = 45000/1.15 = 39130.43

Discounted payback = 0.89 Years

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