BSU Inc. wants to purchase a new machine for $41,200, excluding $1,400 of instal

Question

BSU Inc. wants to purchase a new machine for $41,200, excluding $1,400 of installation costs. The old machine was bought five years ago and had an expected economic life of 10 years without salvage value. This old machine now has a book value of $2,200, and BSU Inc. expects to sell it for that amount. The new machine would decrease operating costs by $9,000 each year of its economic life. The straight-line depreciation method would be used for the new machine, for a six-year period with no salvage value.

(Using the Present value of an annuity of 1 table) Determine the cash payback period.

Explanation / Answer

We hace CF0 = Sale of old machine - Cost of New machine-Instal cost

= 2200-41200-1400 = 40400

Dep using SLN = (Cost-salvage)/Life = (41200+1400)/6 = 7100

In Y1 to Y6, we have

Gross Profit= (Op cost saving - Dep) = 9000-7100 = 1900

SO CF1 to Cf6 = Gross profit + Dep written back = 1900+7100=9000

So Cash PBP = Initial Inv/Annual CF

= 40400/9000 = 4.49 Yrs

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