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

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

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?

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