Question

10 points An electronics company estimated the investment cost for equipment for producing replacement CCTV will be $800,000. The operating and maintenance cost is expected to be $500,000 per year with an annual revenues esumated at $650,000. Considering MARR of 15 per year, ind The simple payback penod -years The discounted payback period.....years

Answer 1

Solution

Initial Investment = $ 800,000

Annual Estimated Revenue = $ 650,000

Annual Operating Expenses = $ 500,000

Net Cash Flow = $ (650,000 - 500,000) = $ 150,000

(1) Simple Payback Period = (800,000 / 150,000) = 5.33 (Approx)

Therefore, Simple Payback Period = 5.33 Years

(2) For Discounting Payback Period, refer following table,

Year	CFAT ($)	PVIF @ 15%	Discounted CFAT ($)	Cumulated Disc. CFAT ($)
1	1,50,000.00	0.8696	1,30,434.78	1,30,434.78
2	1,50,000.00	0.7561	1,13,421.55	2,43,856.33
3	1,50,000.00	0.6575	98,627.43	3,42,483.77
4	1,50,000.00	0.5718	85,762.99	4,28,246.75
5	1,50,000.00	0.4972	74,576.51	5,02,823.26
6	1,50,000.00	0.4323	64,849.14	5,67,672.40
7	1,50,000.00	0.3759	56,390.56	6,24,062.96
8	1,50,000.00	0.3269	49,035.27	6,73,098.23
9	1,50,000.00	0.2843	42,639.36	7,15,737.59
10	1,50,000.00	0.2472	37,077.71	7,52,815.29
11	1,50,000.00	0.2149	32,241.48	7,85,056.78
12	1,50,000.00	0.1869	28,036.07	8,13,092.85

From the highlighted part, it can be seen that $ 800,000 can be recovered in 11 to 12 years under Discounted Payback Period method. Using interpolation method,

(X-11) / (12-11) = (800000 - 785056.78) / (813092.85 - 785056.78)

Or, X-11 = 14943.22 / 28036.07

Or, X-11 = 0.533

Or, X = 11 + 0.533

Or, X = 11.533

Therefore, Discounted Payback Period = 11.533 Years