Question

BioFarm Inc. wants to replace its current equipment with new high-tech equipment. The existing equipment was purchased 5 years ago at a cost of $120,000. At that time, the equipment had an expected life of 10 years, with no expected salvage value. The equipment is being depreciated on a straight-line basis. Currently, the market value of the old equipment is $43,000.

The new equipment can be bought for $173,460, including installation. Over its 10-year life, it will reduce operating expenses from $192,400 to $145,100 for the first six years, and from $201,400 to $194,000 for the last four years. Net working capital requirements will also increase by $20,900 at the time of replacement.

It is estimated that the company can sell the new equipment for $24,400 at the end of its life. Since the new equipment’s cash flows are relatively certain, the project’s cost of capital is set at 10%, compared with 15% for an average-risk project. The firm’s maximum acceptable payback period is 5 years.

Calculate the project’s cash payback period. (Round answer to 2 decimal places, e.g. 15.25.)

Answer 1

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