X Company is considering an upgrade to its computer equipment that will cost $8,
ID: 2452966 • Letter: X
Question
X Company is considering an upgrade to its computer equipment that will cost $8,000 but result in smaller operating costs. Estimated annual operating costs are as follows:
If X Company decides to replace the equipment, what is the payback period (in years)?
Present Value of $1.00
Present Value of an Annuity of $1.00
Year no upgrade upgrade 1 $-6,000 $-7,000 2 -8,000 -4,000 3 -8,000 -3,000 4 -8,000 -3,000 5 -6,000 -3,000 6 -5,000 -2,000 7 -4,000 -2,000Explanation / Answer
Payback Period = Cost of Project / Annual Cash Inflows Payback Period ignores time value of money Year No upgrade Upgrade Net cash flow Cummualtive cashflow 0 - 8,000 (8,000) (8,000) 1 6,000 7,000 (1,000) (9,000) 2 8,000 4,000 4,000 (5,000) 3 8,000 3,000 5,000 - 4 8,000 3,000 5,000 5,000 5 6,000 3,000 3,000 8,000 6 5,000 2,000 3,000 11,000 7 4,000 2,000 2,000 13,000 Conclusion: from the above caculation the pay back period is 3 years when the cummulative cashflow showing a Nil balance
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