Question

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 $72,000. The manager believes that the new investment will result in direct labor savings of $24,000 per year for 10 years. Present Value of an Annuity of $1 at Compound Interest 20% Year 6% 10% 12% 15% 1 0.943 0.909 0.893 0.870 0.833 1.736 2 1.833 1.690 1.626 1.528 2.673 2.487 2.402 2.283 2.106 2.589 4 3.465 3.170 3.037 2.855 3.791 5 4.212 3.605 3.353 2.991 4.355 6 4.917 4.111 3.785 3.326 5.582 4.868 4.160 3.605 7 4.564 8 6.210 5.335 4.968 4.487 3.837 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? 3 years b. What is the net present value, assuming a 10% rate of return? Use the table provided above. Round to the nearest whole dollar. 123,480 X Net present value c. What else should the manager consider in the analysis? Taxes and maintenance costs.

Answer 1

Present value of cash inflows = Annual savings x Present value annuity factor (i%, n)

= 24,000 x PVAF (10%, 10)

= 24,000 x 6.145

= $147,480

Net present value = Present value of cash inflows - Cost of equipment

= 147,480 - 72,000

= $75,480

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