Question

A new process to manufacture a certain type of product will have an initial cost of $ 35,000, with annual costs of $ 17,000. The additional revenue associated with the new process is expected to be $ 22,000 per year. What is the payback period with a TREMA = 10%,

Answer 1

Simple payback period = Initial cost / Annual net savings

= 35000 / (22000 - 17000)

= 35000 / 5000

= 7 years

Discounted payback period:-

Year	Annual Saving	PVIF @ 10%	PV of Saving	Cumulative PV of saving
1	5000	0.9091	4545.5	4545.5
2	5000	0.8264	4132	8677.5
3	5000	0.7513	3756.5	12434
4	5000	0.6830	3415	15849
5	5000	0.6209	3104.5	18953.5
6	5000	0.5645	2822.5	21776
7	5000	0.5132	2566	24342
8	5000	0.4665	2332.5	26674.5
9	5000	0.4241	2120.5	28795
10	5000	0.3855	1927.5	30722.5
11	5000	0.3505	1752.5	32475
12	5000	0.3186	1593	34068
13	5000	0.2897	1448.5	35516.5

Since the discounted cash flow exceeds initial cost of 35,000 in the 13th year, the discounted payback period is 13 years.