Question

Cash Payback Period, Net Present Value Analysis, and Qualitative Considerations The plant manager of Shenzhen Electronics Company is considering the purchase of new automated assembly equipment. The new equipment will cost $375,000. The manager believes that the new investment will result in direct labor savings of $75,000 per year for 10 years.

Present Value of an Annuity of $1 at Compound Interest
Year	6%	10%	12%	15%	20%
1	0.943	0.909	0.893	0.870	0.833
2	1.833	1.736	1.690	1.626	1.528
3	2.673	2.487	2.402	2.283	2.106
4	3.465	3.170	3.037	2.855	2.589
5	4.212	3.791	3.605	3.353	2.991
6	4.917	4.355	4.111	3.785	3.326
7	5.582	4.868	4.564	4.160	3.605
8	6.210	5.335	4.968	4.487	3.837
9	6.802	5.759	5.328	4.772	4.031
10	7.360	6.145	5.650	5.019	4.192

a. What is the payback period on this project?
years

b. What is the net present value, assuming a 10% rate of return? Use the table provided above. Round to the nearest whole dollar.

Net present value

$

Answer 1

SOLUTION

A. Cash payback period is the approach used to know the period what a new projects takes to get back the cash which had been invested.

Cash pay back period = Initial cost / Annual net cash inflow

= $375,000 / $75,000 = 5 years

B. Net present value is today's value of future cash inflows at the rate of return which is acceptable by the company, which is compared with the present value of cash outflow.

Particulars	Cash inflows	Annuity factor @10%	Present value of cash flow
Cash inflows	75,000	6.145	460,875
Cost of automated assembly equipment			375,000
Net present value of equipment			85,875