Problem 10.6 Blanda Incorporated management is considering investing in two alte

Question

Problem 10.6 Blanda Incorporated management is considering investing in two alternative production systems. The systems are mutually exclusive, and the cost of the new equipment and the resulting cash flows are shown in the accompanying table. If the firm uses a 9 percent discount rate for their production systems. Year System 1 System 2 0 -$13,600 -$42,000 1 13,600 30,700 2 13,600 30,700 3 13,600 30,700 What are the payback periods for production systems 1 and 2? (Round answers to 2 decimal places, e.g. 15.25.) Payback period of System 1 is_____________ years and Payback period of System 2 is ____________ years If the systems are mutually exclusive and the firm always chooses projects with the lowest payback period, in which system should the firm invest? The firm should invest in________________________ .

Explanation / Answer

Hi, If you like my answer rate me first...that way only I can earn points. Thanks Year System 1 System 2 0 -$13,600 -$42,000 1 13,600 30,700 2 13,600 30,700 3 13,600 30,700 Payback period of System 1 is = 1 year Payback period of System 2 is = 1 + (42000-30700)/30700 = 1.37 years The firm should invest in System 1

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