9.6 Problem 9.6 Blanda Incorporated management is considering investing in two a

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9.6 Problem 9.6 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 $12,200 $45,100 1 12,200 2 12,200 33,600 3 12,200 33,600 33,600 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 Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

Clearly in system 1, the payback period is 1.

Payback period = 1 + 0/12200 = 1

Payback period = 1 + |-11500|/33600

Payback period = 1 + 11500/33600 = 1 + 0.34 = 1.34

The firm should invest in system 1.

Year Cash flow of system 1 Cumulative Cash flow of system 1 0 -12200 -12200 1 12200 0 2 12200 12200 3 12200 24400

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