Question: Please show formulas P102 Payback comparisons Nova Products has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new machine
Please show formulas
P102 Payback comparisonsNova Products has a 5-year maximum acceptable payback period. The firm is considering the purchase of a new machine and must choose between two alternative ones. The first machine requires an initial investment of $14,000 and generates annual after-tax cash inflows of $3,000 for each of the next 7 years. The second machine requires an initial investment of $21,000 and provides an annual cash inflow after taxes of $4,000 for 20 years.
Determine the payback period for each machine.
Comment on the acceptability of the machines, assuming that they are independent projects.
Which machine should the firm accept? Why?
Do the machines in this problem illustrate any of the weaknesses of using payback? Discuss.
| P10-2 | |||
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| Initial Investment-1st Machine = |
| $14,000 |
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| After-Tax Cash Inflows- 1st Machine = |
| $3,000 |
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| Initial Investment-2nd Machine = |
| $21,000 |
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| After-Tax Cash Inflows- 2nd Machine = |
| $4,000 |
| Payback Period: | |||
| a. |
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| Machine #1 = |
| Years |
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| Machine #2 = |
| Years |
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| b. | Comment on acceptability: |
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| Machine #1: |
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| Machine #2: |
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| c. | Which machine should be accepted: |
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| d. | Weaknesses of payback method: |
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