Payback comparisons Novo Products haz 4 ycar maximum scccpsb c p ack peno The rm

Question

Payback comparisons Novo Products haz 4 ycar maximum scccpsb c p ack peno The rm is consi emo the purchase o a new mach n: nd mus choose bet ecn t o alte ati es The fi s mochi c qures an in al nvestmen o $17.000 and geno ual fter tax caz inflows o $6 000 or cach ofthe es a next 12 years. The seod machine require an iitiel investment of 534000 andprovides an annuel cash irow after taxes of 9000 for 22 years u. Determine the vaye penor eahmachire. b Comment onthe acoeptabiity of the mechinee, a8suming thel ey are independent projects d. Do the machinas In ths prablam Ilustrate any of the weakrs of using paback? a. I ha payback parind tnr thatist machina yaars 'Hard to two decimal plaCAS The paybeck period for the second medinei yeers (Round to wo decimel plsose.) b. s the firr machineaccpabic? (Salecha best anser halo O No Is the sccord machina accptblc?(Sclecthe best answar below) O No c·Based on their payback prods, which machine should the irm accopt? [Select the best onswer bclow.} OA. Nether B. Machine 1 O C. Machina 2 d. Do 1hernachines in thi problem, 1rste 8ny of The w88kres8of using payback? (3eled the best newer below. A. Machina 2 has rah rns that last 22 yAAfA hle Machina 1 has only 12 years t raturns Payback consis r this dit! renoa il induda all cash, inflow beyond tha payback perid O B. Mochin 2ha rcurns that laz cnly 12 ycars whic Machinc 1 has 22 ycars af returna Paybck cannot canidar thi diferencc it ignores all cash in byond the paytack pcriod C. Machine 2ha e reurns that lest 22 y9818 tile Macine 1 has only 12 yeers or returns Payteck considers only the irs! 12 yeers ror each madine O D. Machin 2hs rcburns that last 22 ycarswhic Machinc has only 12 ycars af rcturns. Paybock cannot conidar this ditiarenc it gnors all cah no bcyond the paytack period

Explanation / Answer

both are within acceptable payback period of 4 years. However,  Ist machine is preferred as it has shorter payback period.

option B is the limitation of payback method. it ignores all cash inflows beyond payback period.

Particulars Ist Machine 2nd Machine Outlay $ 7,000 $            34,000 annual Inflow $ 5,000 $ 9,000 Payback 3.4 3.8 (outlay/annual inflow)

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