1. Cash Payback Period, Net Present Value Analysis, and Qualitative Considerations

   The plant manager of Shenzhen Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost $96,000. The manager believes that the new investment will result in direct labor savings of $32,000 per year for 10 years.

   Present Value of an Annuity of $1 at Compound Interest
   Year	6%	10%	12%	15%	20%
   1	0.943	0.909	0.893	0.870	0.833
   2	1.833	1.736	1.690	1.626	1.528
   3	2.673	2.487	2.402	2.283	2.106
   4	3.465	3.170	3.037	2.855	2.589
   5	4.212	3.791	3.605	3.353	2.991
   6	4.917	4.355	4.111	3.785	3.326
   7	5.582	4.868	4.564	4.160	3.605
   8	6.210	5.335	4.968	4.487	3.837
   9	6.802	5.759	5.328	4.772	4.031
   10	7.360	6.145	5.650	5.019	4.192

   a. What is the payback period on this project? years

   b. What is the net present value, assuming a 12% rate of return? Use the table provided above. Round to the nearest whole dollar.

   Net present value

   $

   c. What else should the manager consider in the analysis? Taxes and maintenance costs.

   Feedback

   a. Divide the amount to be invested by the annual net cash flow.

   b. Subtract the cost from the present value of the annual net cash flow. (Use the present value of an annuity factor for 10 periods at 12%, Exhibit 5.)

   c. Consider all cash flows.

   Learning Objective 2, Learning Objective 3 and Learning Objective 4.

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