Question

X Company must replace one of its current machines with either Machine A or Machine B. The useful life of both machines is seven years. Machine A costs $51,000, and Machine B costs $70,000. Estimated annual cash flows with the two machines are as follows:

Year	Machine A	Machine B
1	$-6,000	$-7,000
2	-8,000	-4,000
3	-8,000	-3,000
4	-8,000	-3,000
5	-6,000	-3,000
6	-5,000	-2,000
7	-4,000	-2,000

If X Company buys Machine B instead of Machine A, what is the payback period (in years)?

X Company must replace one of its current machines with either Machine A or Machine B. The useful life of both machines is seven years. Machine A costs $51,000, and Machine B costs $70,000. Estimated annual cash flows with the two machines are as follows: Year Machine A $-6,000 -8,000 -8,000 -8,000 -6,000 -5,000 -4,000 Machine B $-7,000 -4,000 -3,000 -3,000 -3,000 -2,000 -2,000 If X Company buys Machine B instead of Machine A, what is the payback period (in years)? 5 Submit Answer Incorrect. Tries 1/3 Previous Tries

Answer 1

Additional cost to Buy Machine B = $70000 - 51000 = $19,000

Year	Cash Flow(Machine A )	Cash Flow(Machine B )	Incremental Cash flows	Cumulative Cash flows
a	b	c	d =c-b	e
0			-19000	-19000
1	-6000	-7000	-1000	-20000
2	-8000	-4000	4000	-16000
3	-8000	-3000	5000	-11000
4	-8000	-3000	5000	-6000
5	-6000	-3000	3000	-3000
6	-5000	-2000	3000	0
7	-4000	-2000	2000	2000

Payback period is 6 years.