Refer to Problem 5.2, and answer the following questions:
(a) How long does it take to recover the investment?
(b) If the firm's interest rate is 15% after taxes, what would be the discounted payback period for this project?
Problem 5.2
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 are 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.
(a) Identify the cash inflows over the life of the project.
(b) Identify the cash outflows over the life of the project.