Casper Ceramics is considering the purchase of new production technology that would require an initial investment of

Question:

Casper Ceramics is considering the purchase of new production technology that would require an initial investment of $1,500,000 and have an expected life of 10 years. At the end of its life, the equipment would have no salvage value. By installing the new equipment, the firm's annual labor and quality costs would decline by $300,000.

a. Compute the payback period for this investment.

b. Assume instead that the annual cost savings would vary according to the following schedule:

Years Annual Cost Savings

1–5 .........$150,000

6–10 ........ 200,000

Compute the payback period under the revised circumstances.

Salvage Value
Salvage value is the estimated book value of an asset after depreciation is complete, based on what a company expects to receive in exchange for the asset at the end of its useful life. As such, an asset’s estimated salvage value is an important... Payback Period
Payback period method is a traditional method/ approach of capital budgeting. It is the simple and widely used quantitative method of Investment evaluation. Payback period is typically used to evaluate projects or investments before undergoing them,...