ABC Ltd. is considering purchasing new machines that should produce considerable cost savings in its assembly operations. The cost of each machine is $25,000 and neither is expected to have a salvage value at the end of a 4-year useful life. ABC Ltd. Company's required rate of return is 12% and the company prefers that a project return its initial outlay within the first half of the project's life. The annual after-tax cash savings for each machine are provided in the following table:

Year            Machine A           Machine B
1                       10,000                  15,000

2                      10,000                   12,000

3                      10,000                     8,000

4                      10,000                    5,000

Total               40,000                  40,000

Required:

A) Compute the payback period for each machine.

B) Compute the net present value for each machine.

C) Which machine should be purchased?

D) Rank the project using Profitability index.

Answer rating: 100% (QA)

A Payback Period The payback period is the time it takes for a project to recover its initial invest... View the full answer