a. Compute the payback period for each of the alternatives. Round answers to two

Question

a. Compute the payback period for each of the alternatives. Round answers to two decimal places.

b. Using the net present value method, prepare an analysis. (The company uses a 12 percent minimum desired rate of return.)

Determine which machine the company should purchase.
SelectMachine XMachine Y

Machine X years Machine Y years The Wyckoff Company specializes in decorative fruit baskets. Currently, the company is analyzing purchase alternatives for a fruit-polishing machine. Data relevant to the decision are as follows: Machine X Machine Y Cost dollar 80,000 dollar72,000 Useful life 5 years 5 years Residual value dollar2,000 dollar3,000 Estimated annual net cash flows dollar32,000 dollar28,000 Present value multipliers at 12 percent: Dollar received at the end of five years .567 Dollar received at the end of each of the next five years 3.605 a. Compute the payback period for each of the alternatives. Round answers to two decimal places. Machine X years Machine Y years b. Using the net present value method, prepare an analysis. (The company uses a 12 percent minimum desired rate of return.) Machine X Machine Y Present value of cash flows dollar dollar Present value of residual value Total present value dollar dollar Less cost of machine Positive net present value dollar dollar Determine which machine the company should purchase.

Explanation / Answer

a. Compute the payback period for each of the alternatives. Round answers to two decimal places.

Machine X      $80,000 / $32,000 = 2.50 years

Machine Y      $72,000 / $28,000 = 2.57 years

b. Using the net present value method, prepare an analysis. (The company uses a 12 percent minimum desired rate of return.)

                                             Machine X       Machine Y
Present value of cash flows
$32,000 x 3.605                      $115,360
$28,000 x 3.605                                          $100,940

Present value of residual value
$2,000 x 0.567                        $1,134
$3,000 x 0.567                                              $1,701

Total present value               $116,494        $102,641
Less cost of machine              $80,000         $72,000
Positive net present value     $36,494         $30,641

Determine which machine the company should purchase.   Machine X
Select Machine X Machine Y

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