Heartland Paper Company is considering the purchase of a new high-speed cutting
ID: 2498479 • Letter: H
Question
Heartland Paper Company is considering the purchase of a new high-speed cutting machine. Two cutting machine manufacturers have approached Heartland with proposals: (1) Toledo Tools and (2) Akron Industries. Regardless of which vendor Heartland chooses, the following incremental cash flows are expected to be realized: Year Incremental Cash Inflows Incremental Cash Outflows 1 $ 26,000 $ 20,000 2 27,000 21,000 3 32,000 26,000 4 35,000 29,000 5 34,000 28,000 6 33,000 27,000 a. If the machine manufactured by Toledo Tools costs $27,000, what is its expected payback period? (Round your answer to 1 decimal place.) b. If the machine manufactured by Akron Industries has a payback period of 66 months, what is its cost? c. Which of the machines is most attractive based on its respective payback period? Akron Industries Toledo Tools
Explanation / Answer
a. If the machine manufactured by Toledo Tools costs $27,000, what is its expected payback period? (Round your answer to 1 decimal place.)
Year Incremental Incremental Incremental
Cash Inflows Cash Outflows Surplus
1 $ 26,000 $ 20,000 $6,000
2 27,000 21,000 $12,000
3 32,000 26,000 $18,000
4 35,000 29,000 $24,000
5 34,000 28,000 $30,000
6 33,000 27,000 $36,000
Payback period is 4.5 years
b. If the machine manufactured by Akron Industries has a payback period of 66 months, what is its cost?
Incremental cash flow per year $6,000
Cash flow for 66 months $33,000
Cost is $33,000
c. Which of the machines is most attractive based on its respective payback period? Akron Industries Toledo Tools
Toledo Tools has a lesser cost of $27,000, which has a payback period of 4.5 years, hence this offer is attractive.
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