Houston Corp. is replacing its laser cutting machine used in the manufacturing process. The following information was
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Question:
Houston Corp. is replacing its laser cutting machine used in the manufacturing process. The following information was gathered for two machine proposals are being considered to replace the current machine.
Cutter 1 | Cutter 2 | |
Initial investment in equipment | $240,000 | $240,000 |
Annual after-tax cash saved by operations: | ||
Year 1 | 80,000 | 45,000 |
Year 2 | 65,000 | 78,000 |
Year 3 | 52,000 | 92,000 |
Year 4 | 30,000 | 30,000 |
Year 5 | 20,000 | 2,000 |
a. Calculate the payback period for Cutter 1 and Cutter 2.
b. What is an important reason that the payback method is helpful when making capital investment decisions?
Related Book For
Intermediate Accounting
ISBN: 978-0077400163
6th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson
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