Question

Problem 1: Due to increased demand, the management of Bubble Tea Beverage Company is considering to purchase new equipment to increase the production and sales revenues. The useful life of the equipment is 5 years and the company's maximum desired payback period is 2 years. The inflow and outflow of cash associated with the new equipment is given below: $80,000 $100,000 The initial cost of equipment Annual cash inflow: Sales (all cash) Annual cash outflow: Cost of ingredients Salaries expenses Maintenance expenses $15,000 $25,000 $2,000 Required: Draw a timeline of cash flows for this scenario. Compute payback period for this equipment purchase. Should Bubble Tea Beverage Company purchase the new equipment? Why or why not?

Answer 1

Payback period calculation payback period Total initial capital investment Annual net cash inflow Initial cash outflow Annual cash inflows (working Note 1) $ $ 80,000 58,000 payback period Il sles 80,000 58,000 1.38 II or 1 year 5 months approx. Since payback period is less than 2 years therefore, company should buy the product Working note 1 Sales Less: Cost of ingedriants Less: Salary expense Less: Maintenance expnese Annual cash inflows $ $ $ $ $ 100,000 15,000 25,000 2,000 58,000