Question

8 pt X Company must replace one of its current machines with machines is seven years. Machine A costs $52,000, and Machine B replace one of its current machines with either Machine A or Machine B. The useful life of both machines are as follows: Machine A costs $52,000, and Machine B costs $60,000. Estimated annual cash flows with the two Year Machine A Machine B $-6,000 $-7,000 -8,000 -4,000 -3,000 -8,000 -3,000 -6,000 -3,000 -5,000 -2,000 -4,000 -2,000 -8,000 VON If X Company buys Machine B instead of Machine A, what is the payback period (in years)? 11. AO 2 BO 3 CO 4 DO 5 EO 6 FO7

Answer 1

Extra cost of Machine B = 60,000-52,000 = $8000
Year	Incremental Cash flows	Cumulative Cash flows
0	-8000	-8000
1	-1000	-9000
2	4000	-5000
3	5000	0
4	5000	5000
5	3000	8000
6	3000	11000
7	2000	13000
Hence, payback period = 3 years
i.e. B