Question

An improved power washer is being considered to clean parts at a manufacturing company. It is estimated to cost $20,000 more than the less efficient alternative but save $5,000 per year in water and electrical costs and is expected to last for 15 years prior to needing replacement. If the firm has a target ROI of 12%, determine simple payback using the incorrect method that does not include TVM. Next, calculate the correct payback period using TVM techniques. Is this a reasonable payback expectation? If the savings were to decrease to $3,000/ year, how long would it take to pay back? Is this reasonable?

(note: you can use interest tables in the book to “bracket” payback with TVM or calculate using different values in equations. A range is sufficient for the answer)

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Answer 1

1.)
Payback disregarding time value of money = Initial Cost/ Annual Savings
			=	20000/5000
				4	Years	ANS
b.)
Using TVM		5000
	Years		Savings Discounted at 12%	Cumilative
	1	0.892857143	4464.285714	4464.285714
	2	0.797193878	3985.969388	8450.255102
	3	0.711780248	3558.901239	12009.15634
	4	0.635518078	3177.590392	15186.74673
	5	0.567426856	2837.134279	18023.88101
	6	0.506631121	2533.155606	20557.03662
	7	0.452349215	2261.746077	22818.78269
	8	0.403883228	2019.41614	24838.19883
	9	0.360610025	1803.050125	26641.24896
	10	0.321973237	1609.866183	28251.11514
	11	0.287476104	1437.38052	29688.49566
	12	0.256675093	1283.375465	30971.87113
	13	0.22917419	1145.870951	32117.74208
	14	0.204619813	1023.099063	33140.84114
	15	0.182696261	913.4813063	34054.32245
		5 +	(20000-18023.88)/2533.16
		5 +	0.780101698
		5.78		Years	ANS
c.)
If Savings decrease to $3000
		3000
	Years		Savings Discounted at 12%	Cumilative
	1	0.892857143	2678.571429	2678.571429
	2	0.797193878	2391.581633	5070.153061
	3	0.711780248	2135.340743	7205.493805
	4	0.635518078	1906.554235	9112.04804
	5	0.567426856	1702.280567	10814.32861
	6	0.506631121	1519.893364	12334.22197
	7	0.452349215	1357.047646	13691.26962
	8	0.403883228	1211.649684	14902.9193
	9	0.360610025	1081.830075	15984.74938
	10	0.321973237	965.9197098	16950.66909
	11	0.287476104	862.4283123	17813.0974
	12	0.256675093	770.0252788	18583.12268
	13	0.22917419	687.5225704	19270.64525
	14	0.204619813	613.8594378	19884.50468
	15	0.182696261	548.0887838	20432.59347
		14 +	(20000-19884.51)/584.09
		14 +	0.210723735
		14.21		Years	ANS

THANK YOU
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