Question

Problem 3 (25 points) A machine which can be use to produce an aircraft part from titanium has an initial cost of S140000 (initial investment at year 0) with annual operating cost of $25,000 and revenue of 75,000 per year starting 3 years from now. In year 4, $8000 was given to the company by Environmental Protection Agency as credit for its environmental compliance. What is the payback period at a)0% b) 12% Given the two guesses for x number of years to be between 4 yrs and 5 yrs at 12 % besides the 2 years of no activity. Ensure you draw one cash flow diagram for the two interest rates.

Answer 1

	Net Cashflows
	0%	Formula	12%	Formula
Year 0	-140000		($140,000.00)
Year 1	-25000		($22,321.43)	PV(0.12,1,,-25000)
Year 2	-25000		($19,929.85)	PV(0.12,2,,-25000)
Year 3	50000	75000-25000	$35,589.01	PV(0.12,3,,-50000)
Year 4	58000	75000-25000+8000	$36,860.05	PV(0.12,4,,-58000)
Year 5	50000		$28,371.34	PV(0.12,5,,-50000)
Year n	50000

Payback period is calculated such that the cumulative cash flows are equal to initial investment.

	Net Cashflows
	0%	Cumulative	12%	Cumulative
0	-140000		-140000
1	-25000	-25000	-22321	-22321
2	-25000	-50000	-19930	-42251
3	50000	0	35589	-6662
4	58000	58000	36860	30198
5	50000	108000	28371	58569
6	50000	158000	25332	83901
7	50000		22617	106518
8	50000		20194	126712
9	50000		18031	144743

Payback period at 0% = 5+42/50 = 5.84 years

Payback period at 12% = 5+13288/18031 = 8.74 years

50,000 ·58,000 450,000 50,000 50,000 450,000 ·50,000 35,589 36,860 28,371 25,332 22,617 20,194 18,031 22,321Y-19,930 -140,000 ▼-25,000 -25,000 2 0 4 6